<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
UROLOGIX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1697237
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14405 21ST AVENUE NORTH
MINNEAPOLIS, MN 55447
(612) 475-1400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JACK E. MEYER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
UROLOGIX, INC.
14405 21ST AVENUE NORTH
MINNEAPOLIS, MN 55447
(612) 475-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
THOMAS G. LOVETT, IV, ESQ. PATRICK F. COURTEMANCHE, ESQ.
BARBARA LANO RUMMEL, ESQ. DORSEY & WHITNEY LLP
LINDQUIST & VENNUM P.L.L.P. PILLSBURY CENTER SOUTH
4200 IDS CENTER 220 SOUTH SIXTH STREET
80 SOUTH 8TH STREET MINNEAPOLIS, MN 55402-1498
MINNEAPOLIS, MN 55402 (612) 340-2600
(612) 371-3211
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value
per share............. 1,725,000 $22.125 $38,165,625 $11,566
</TABLE>
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(1) Includes 225,000 shares subject to the Underwriters' overallotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
OCTOBER 16, 1997
1,500,000 Shares
(LOGO)
Common Stock
--------
All of the shares of common stock, $.01 par value per share (the "Common
Stock") offered hereby are being sold by Urologix, Inc. ("Urologix" or the
"Company"). The Company's Common Stock is traded on the Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the symbol "ULGX." On
October 15, 1997, the last reported sale price for the Company's Common Stock
was $22.19 per share. See "Price Range of Common Stock."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" APPEARING ON PAGES 6 TO 11.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
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<S> <C> <C> <C>
Per share........................ $ $ $
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Total(2)......................... $ $ $
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</TABLE>
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(1) Before deducting expenses of the offering estimated at $500,000 payable by
the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
225,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ , and
$ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland on or about ,
1997.
BT ALEX. BROWN
DAIN BOSWORTH
Incorporated
PAINE WEBBER INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[Urologix Logo]
The Targis System includes the
stand-alone portable Targis
Control Unit that provides all
necessary patient connections and
user interfaces.
[Photo of Targis System]
The single-use Targis Catheter
emits microwave energy from a
proprietary antenna contained
within the catheter.
[Photo of Targis Catheter]
The proprietary Urologix Targis
technology uses microwave energy
to preferentially heat targeted
regions of the diseased prostate
causing cell death. Catheter
cooling protects the urethra,
minimizing risk and discomfort to
the patient both during and after
treatment.
[Photo of transverse
section of BPH prostate]
Transverse section of BPH
prostate showing temperature
profile created by the
Targis System.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR
MAINTAIN THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND OTHER SELLING
GROUP MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
Urologix, "The Issue is Quality of Life" and Targis are trademarks of the
Company.
Trademarks of others are also referred to in this Prospectus.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. Except as otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
See "Underwriting."
THE COMPANY
Urologix develops, manufactures and markets minimally invasive medical
devices for the treatment of urological diseases. The Company's initial
product, the Targis System, is designed to treat benign prostatic hyperplasia
("BPH"), commonly known as "enlarged prostate." BPH dramatically affects the
quality of life of millions of men by causing adverse changes in urinary
voiding patterns. The Targis System has been approved for marketing in the
United States, the 15 European Union countries, Japan and Canada. The Company
is currently selling the Targis System outside the United States through
distributors and intends to begin marketing the Targis System in the United
States through its direct sales force in the fourth calendar quarter of 1997.
The Targis procedure is a non-surgical, catheter-based therapy that uses a
proprietary microwave technology that preferentially heats diseased areas of
the prostate to a temperature sufficient to cause cell death, while
simultaneously cooling and protecting the pain-sensitive urethral tissue.
Because the urethra is protected from heat and is not punctured or penetrated,
a Targis procedure can be performed without general or regional anesthesia or
intravenous sedation. Accordingly, the procedure can be performed in a low-cost
setting such as a physician's office or an outpatient clinic. The Company
believes that the Targis System provides an efficacious, safe and cost-
effective procedure for the treatment of BPH without the complications and side
effects inherent in most current treatments, and as such, is well positioned to
address the needs of physicians, patients and payors.
Evidence of BPH typically begins to appear in men in their 50s, and by age 70
the quality of life of most men is negatively affected by BPH symptoms. These
troubling symptoms include increased frequency of urination, a sudden urge to
urinate and a weak flow of urine. It is estimated that at least 23 million men
worldwide, including six million men in the United States, suffer moderate to
severe symptoms of BPH. It is further estimated that in the United States over
70% of these men live with the symptoms of the disease, an approach known as
"watchful waiting," rather than pursue surgery or prolonged drug treatment.
Despite the fact that only a small portion of sufferers receive treatment, BPH-
related expenditures are estimated to be $8 billion worldwide annually, with $3
billion spent annually in the United States.
BPH has historically been treated by surgical intervention or by drug
therapy. The primary surgical treatment for BPH is transurethral resection of
the prostate ("TURP"), a procedure in which an electrosurgical loop is used to
cut away the prostatic urethra and surrounding diseased tissue in the prostate,
thereby widening the urethral channel for urine flow. The TURP procedure
requires the use of general or spinal anesthesia and almost always results in
post-treatment hospitalization, both of which add significantly to the total
treatment cost. A significant number of patients who undergo TURP encounter
both short- and long-term complications. These complications can include
painful urination, retrograde ejaculation, infection, impotence, long-term
incontinence, excessive bleeding and complications related to anesthesia. Drug
therapy has emerged as an alternative to surgery in the last several years.
While it is estimated that 1.5 million men in the United States will use drug
therapy for BPH in 1997, independent clinical studies have shown that many men
using drug therapy do not realize clinically significant relief from BPH
symptoms. An estimated 30% to 40% of patients who initially pursue drug therapy
to treat their
3
<PAGE>
BPH symptoms discontinue treatment within 12 months for various reasons,
including the inconvenience of the daily regimen, dissatisfaction with symptom
relief and undesirable side effects ranging from dizziness, headache and
fatigue to impotence, decreased libido and other sexual dysfunctions, depending
on the type of drug therapy used.
The Company's clinical studies demonstrated that most patients who received
the Targis therapy experienced a significant improvement in BPH symptoms and
urine flow rates, minimal complications and post-treatment discomfort, and were
able to return to normal activities within a few days. As of August 1, 1997,
755 patients affected with BPH have been treated with the Company's Targis
System in controlled clinical studies, including 46 patients with three-year
follow-up data. The Company submitted results of its clinical studies to the
United States Food and Drug Administration (the "FDA") in its premarket
approval application ("PMA") in February 1997 and subsequently received FDA
approval to market the Targis System in August 1997.
The Company will market the Targis System in the United States with a direct
sales force. Beginning with the hiring of the Company's Executive Vice
President of Sales and Marketing in February 1997, the Company has developed a
sales and marketing team consisting of a director of marketing and a director
of North American sales, geographic marketing managers, product managers,
communication specialists and direct domestic sales representatives, who are
all dedicated to marketing the Targis System. To date, the Company has hired
and trained three sales representatives and is actively recruiting additional
sales representatives. Outside the United States, the Company has developed
broad-based relationships with two parties for market development and sales of
the Targis System. Boston Scientific Corporation ("Boston Scientific"), a
worldwide developer, manufacturer and marketer of medical devices, markets the
Targis System in all countries outside the United States, except Japan. Nihon
Kohden Corporation ("Nihon Kohden"), a major Japanese developer, manufacturer
and marketer of medical devices, markets the Targis System in Japan. Both
Boston Scientific and Nihon Kohden have marketing and sales specialists
dedicated to the Targis System.
The Company's objective is to establish itself as a leader in the design,
development and commercialization of clinically effective, minimally invasive
solutions for urological disorders. To date, the Company has focused on
developing the Targis System for treating BPH. Key elements of the Company's
strategy are to: (i) focus on the large and growing urology market; (ii)
develop a domestic direct sales organization and build upon strong clinical
relationships worldwide; (iii) partner with physicians to increase acceptance
of the Targis System; (iv) establish and enhance strategic partnerships; and
(v) maintain technological leadership and protect technology advantages through
patents.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby................ 1,500,000 shares
Common Stock to be outstanding after the
offering(1)............................... 10,841,196 shares
Use of proceeds............................ To fund sales and marketing expenditures
and expansion of manufacturing capacity and
for working capital and other general
corporate purposes.
Nasdaq National Market symbol.............. ULGX
</TABLE>
- --------
(1) Excludes outstanding options to purchase 973,737 shares of Common Stock as
of June 30, 1997 at a weighted average exercise price of $5.47 per share
under the Company's 1991 Stock Option Plan.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales.......................... $ 164 $ 9 $ 489 $ 362 $ 5,504
Gross profit (loss)............ (90) (170) (296) (815) 638
Research and development
expenses...................... 1,478 1,598 4,099 4,811 5,049
Sales and marketing expenses... 22 124 477 1,007 3,430
Operating loss................. (2,058) (2,569) (5,756) (7,825) (10,067)
Net loss....................... (1,997) (2,525) (5,427) (7,593) (8,234)
Net loss per common share(1)... $ (0.91) $ (1.22) $ (0.90)
Shares used in computing net
loss per common share(1)...... 5,996 6,235 9,173
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and available-for-sale securi-
ties................................................. $26,101 $56,885
Working capital....................................... 27,013 57,797
Total assets.......................................... 35,582 66,366
Total shareholders' equity............................ 32,397 63,181
</TABLE>
- --------
(1) Computed on the basis described for net loss per common share in Note 2 of
Notes to Financial Statements.
(2) Adjusted to give effect to the application of the estimated net proceeds of
this offering at an assumed offering price of $22.19 per share.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus. Statements included in this
Prospectus that are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially. In
particular, the Company's forward looking statements, including those
regarding the Company's ability to: (i) successfully commercialize the Targis
System, (ii) obtain satisfactory reimbursement for the Targis procedure from
governmental and private payors, and (iii) achieve acceptable profit margins,
could be affected by a number of risks and uncertainties including those
described below.
Uncertainty of Market Acceptance. The Targis procedure represents a new
therapy for BPH, and there can be no assurance that the Targis System will
gain any significant degree of market acceptance among physicians, health care
payors or patients. Physicians may elect not to perform the procedure unless
adequate reimbursement from health care payors is available. Health care payor
acceptance of the Targis procedure will require, among other things, evidence
of the cost effectiveness of the Targis procedure as compared to other BPH
therapies. Patient acceptance of the procedure will depend in part on
physician recommendations, as well as other factors, including the degree of
invasiveness, the rate and severity of complications and other side effects
associated with the procedure, as compared to other therapies. There can be no
assurance as to whether and, if so, how frequently patients receiving the
Targis procedure will require retreatment and whether any such retreatment
would be effective or would have a negative impact on patient, physician and
payor acceptance of the Targis procedure. Failure of the Targis System to
achieve significant market acceptance among physicians, health care payors and
patients would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Clinical
Status," "--Sales and Marketing" and "--Third-Party Reimbursement."
Uncertainty Relating to Third-Party Reimbursement. The Company's success
will be largely dependent upon the extent to which satisfactory reimbursement
for the Targis procedure can be obtained from health care payors for
physicians performing the Targis procedure and for costs of the Targis System.
In the United States and in international markets, third-party reimbursement
is generally available for certain existing therapies used for treatment of
BPH. Third-party reimbursement will be dependent upon decisions by the Health
Care Financing Administration ("HCFA") and contract Medicare carriers for
Medicare, individual managed care organizations, private insurers, foreign
governmental health programs and other payors. Failure to establish sufficient
reimbursement from health care payors or adverse changes in governmental and
private third-party payors' policies toward reimbursement for BPH procedures
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Third-Party
Reimbursement."
Dependence on Patents and Proprietary Rights. The Company's success depends
in part on its ability to protect its Targis System and technology under
United States and international patent laws and other intellectual property
laws and to operate without infringing upon the proprietary rights of third
parties. The validity and breadth of claims covered in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property rights.
Companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. Other companies have developed or
are in the process of developing medical methods and devices to
transurethrally treat BPH with microwave energy. Several companies have
applied for, and in some cases received, patents related to such medical
methods and devices.
One of the Company's competitors, BSD Medical Corp. ("BSD"), initiated a
patent infringement lawsuit against the Company in 1992. In March 1994, the
Company chose to enter into a Settlement
6
<PAGE>
Agreement with BSD under which BSD granted the Company a license for the
patent at issue, as well as several other patents (the "BSD Settlement
Agreement"). In addition, in August 1996, the Company entered into a non-
exclusive, worldwide patent license agreement with EDAP TMS S.A., a French
corporation, and its subsidiary, EDAP Technomed, Inc. (collectively referred
to as "EDAP") for certain EDAP patents relating to the microwave treatment of
BPH.
In June 1996, BSD accused the Company of breaching a confidentiality
provision of the BSD Settlement Agreement, and notified the Company that BSD
was terminating the BSD Settlement Agreement. On July 30, 1996, the Company
initiated a lawsuit against BSD to obtain a declaratory judgment that the
Company had not breached the confidentiality provision of the BSD Settlement
Agreement, and that the BSD Settlement Agreement remained in full force and
effect. This lawsuit was filed under seal in the United States District Court
for the District of Minnesota. BSD answered the Company's complaint and
counterclaimed for a declaratory judgment of breach and termination of the BSD
Settlement Agreement. The formal discovery period in the lawsuit has closed
and the case is currently set for trial no later than April 1998. The Company
believes that it has fully complied with the BSD Settlement Agreement, and
intends to continue complying with the BSD Settlement Agreement. The Company
believes that BSD's allegations and purported termination of the BSD
Settlement Agreement are without merit, although there can be no assurance
that the Court will resolve the lawsuit in the Company's favor. A resolution
of the Company's lawsuit in favor of BSD could result in patent litigation
between the Company and BSD. See "Business--Legal Proceedings."
There can be no assurance that the Company's Targis System does not infringe
upon the patent rights or other intellectual property rights of other
companies, that the Company will not be required to seek licenses from other
companies, or that other companies will not pursue claims of infringement
against the Company. The defense and prosecution of intellectual property
suits, United States Patent and Trademark Office interference proceedings and
related legal and administrative proceedings are both costly and time
consuming and would result in a significant diversion of effort and resources
by the Company's technical and management personnel. An adverse determination
in any such litigation or proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties and pay ongoing royalties,
require the Company to redesign the Targis System, or subject the Company to
an injunction preventing the manufacture, use or sale of the Targis System in
the United States or foreign markets. There can be no assurance that the
Company could prevail in any such actions or that necessary licenses would be
available to the Company on satisfactory terms or at all, or that the Company
could satisfactorily redesign the Targis System. In addition to being costly,
protracted litigation to defend or prosecute intellectual property could
result in the Company's customers or potential customers deferring or limiting
their purchase or use of the Company's products until resolution of such
litigation. The occurrence of any of the foregoing could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has been issued 12 United States patents covering its technology
and has 20 additional patent applications pending in the United States. The
Company also has applied for patent coverage in a number of foreign
jurisdictions. The Company either has filed or is preparing to file
international applications under the Patent Cooperation Treaty ("PCT") for
qualifying United States applications and is now pursuing the national phase
in designated PCT countries for the first four applications. There can be no
assurance, however, that any of such applications will result in patents being
issued, or that the Company's issued patents, or any patents which may be
issued as a result of existing or future applications, will offer any degree
of protection. There can be no assurance that any of the Company's patents or
patent applications will not be challenged, invalidated or circumvented in the
future. In addition, litigation may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. There can be no assurance that competitors, many of which have
substantial
7
<PAGE>
resources and have made substantial investments in competing technologies,
will not seek to apply for and obtain patents that will prevent, limit or
interfere with the Company's ability to manufacture or market its products
either in the United States or in international markets.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, through non-disclosure agreements with employees,
consultants and other parties. There can be no assurance that these non-
disclosure agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known to or independently developed by competitors. See
"Business--Patents and Proprietary Rights."
Reliance on Single Product. The Targis System is the Company's sole product.
As such, the Company's future success is entirely reliant upon its ability to
market the Targis System commercially in the United States and elsewhere. If
the Company is unable to commercialize the Targis System successfully, the
Company's business, financial condition and results of operations would be
materially adversely affected.
Limited Manufacturing Experience. The Company has only limited experience in
manufacturing its Targis System and has only recently begun expanding its
manufacturing capabilities for commercial quantities. The Company's facilities
and the facilities of certain of its contract manufacturers will need to
comply with applicable regulations including the FDA's quality system
regulation which includes the FDA's current good manufacturing practice
("GMP") requirements, and with ISO 9001 certification requirements and other
regulations. Any failure to comply with applicable requirements and
regulations by the Company or its contract manufacturers could interrupt or
delay manufacturing of the Targis System, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. As commercialization occurs, the Company will need to hire and
train additional staff, which may result in delays in meeting manufacturing
quality and quantity requirements. If the Company is unable to make the
transition to commercial production at acceptable costs, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Business--Manufacturing," "--Government Regulation"
and "--Employees."
Dependence on Third Party Distributors. To date, substantially all of the
Company's revenues have been derived from sales of its Targis System through
third party distributors outside the United States. Boston Scientific has
exclusive distribution rights for the Targis System in all countries outside
the United States, except Japan, and Nihon Kohden has exclusive distribution
rights in Japan. If either Boston Scientific or Nihon Kohden breached or
terminated their agreement with the Company or encountered financial
difficulties, it could have a material adverse effect on the Company's
business, financial condition and results of operations. Further, the failure
of either of these companies to effectively market the Company's Targis System
could have an adverse effect on the Company's ability to achieve penetration
of these markets and establish long-term acceptance of the Targis System.
Contract Manufacturing; Dependence Upon Key Suppliers. The control unit for
the Targis System is assembled by a contract manufacturer pursuant to a supply
agreement with the Company. If for any reason the contract manufacturer is
unable or unwilling to manufacture the control unit for the Company in the
future, the Company could incur significant delays in obtaining a substitute
contract manufacturer. In addition, the Company purchases additional
components used in the Targis System from various suppliers and relies on
single sources for several components. One such component is obtained from a
source that has a patent for the technology. Delays could be caused if supply
of this component or other components were interrupted. These delays could be
extended in certain situations where a substitute contract manufacturer or a
component substitution would require approval by the FDA of a PMA supplement.
The Company expects to be dependent upon such manufacturers and subcontractors
for the foreseeable future. Therefore, failure to obtain components from such
sources or delays associated with
8
<PAGE>
any future component shortages could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing."
Competition and Technological Advances. Competition in the market for
treatment of BPH is intense and is expected to increase. The Company believes
its principal competition will come from existing surgical therapies, such as
TURP, and non-surgical alternatives, including drug therapy and watchful
waiting. The Company faces and expects increasing competition from numerous
other companies developing drugs and laser, radio frequency, microwave and
other procedures for the treatment of BPH. Many of the Company's competitors
have significantly greater financial, technical, research, marketing, sales,
distribution and other resources than the Company. In addition, the Company's
competitors may succeed in developing or marketing technologies and products
that are more effective or commercially attractive than the Targis System. In
addition, some of the Company's competitors have introduced commercially
marketable competitive products prior to the Company. There can be no
assurance that Urologix will be able to compete successfully against any
competitors. See "Business--BPH Therapies and Their Limitations" and "--
Competition."
Need to Comply with Government Regulation. Government regulation in the
United States and other countries is a significant factor in the development
and marketing of the Company's Targis System and in the Company's ongoing
manufacturing and research and development activities. The Company is
regulated in the United States by the FDA with respect to preclinical and
clinical testing, manufacturing, labeling, distribution, sales, marketing,
advertising and promotion of the Targis System. In order to market and sell
the Targis System, the Company was required to obtain marketing approval from
the FDA. In August 1997, the Company received approval of its PMA from the
FDA. The FDA made the Targis System a restricted device which means that its
labeling specifies requirements for the training of physicians who may use the
device and that the FDA has greater control over advertising for the Targis
System. The FDA also imposed a post-approval study requirement. Failure of the
Company to comply with these and other post-approval requirements could result
in the FDA withdrawing its approval of the PMA for the Targis System. The
Company intends to comply with all post-approval requirements. The FDA's
regulations require agency approval of a PMA supplement prior to marketing for
certain changes if they affect the safety and effectiveness of the device.
Such changes include, but are not limited to: new indications for use; the use
of a different facility or establishment to manufacture, process or package
the device; changes in manufacturing methods or quality control systems;
changes in vendors used to supply components of the device; changes in
performance or design specifications; and certain labeling changes. When
clinical data are required to obtain FDA approval of a PMA supplement, such as
in the event of a change in the indication for use of the Targis System, the
Company will be required to obtain an investigational device exemption ("IDE")
to gather the data. Approval of such an IDE could not be assured on a timely
basis, or at all. There can be no assurance that the required approvals of PMA
supplements for any changes to the Targis System will be granted on a timely
basis or at all, and delays in receipt of, or failure to receive such
approvals, or the loss of the approval of the PMA for the Targis System, would
have a material adverse effect on the business, financial condition and
results of operations of the Company. The FDA also imposes post-marketing
controls on the Company and its products, including medical device reporting
and other requirements. Failure to meet these extensive FDA requirements or
the receipt of adverse FDA determinations regarding the Company's preclinical
studies or clinical trials could subject the Company and/or its employees to
injunction, fines, recall or seizure of products, total or partial suspension
of production, distribution, sales and marketing, suspension or withdrawal of
existing product approvals or clearances, refusals to approve or clear new
applications or notices and criminal prosecution.
Sales of medical devices outside the United States are subject to United
States export requirements and foreign regulatory requirements. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time and requirements to obtain approval by a foreign country may
differ substantially from those required for FDA approval. There can be no
assurance that the Company will be able to obtain regulatory approvals or
clearances for its products in foreign countries. See "Business--Government
Regulation."
9
<PAGE>
Product Liability Risk; Limited Insurance Coverage. The manufacture and sale
of medical products entail significant risk of product liability claims. The
Company maintains product liability insurance coverage of $1.0 million per
occurrence and an annual aggregate maximum of $2.0 million. The Company also
carries a $10.0 million umbrella insurance policy. There can be no assurance
that the Company's existing insurance coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the
clinical trials or future sales of the Targis System. In addition, the Company
may require increased product liability coverage as the Targis System is
commercialized. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A product liability claim or series
of claims brought against the Company with respect to uninsured liabilities or
in excess of the Company's insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, failure to comply with the FDA's GMP regulations
could have a material adverse effect on the ability of the Company to defend
against product liability lawsuits. See "Business--Product Liability and
Insurance."
Need For Additional Future Capital. The Company's capital requirements have
been and will continue to be significant. To date, the Company has been
dependent primarily on the net proceeds of sales of its equity securities,
aggregating approximately $59.0 million. The Company currently has no
committed sources of, or other arrangements with respect to, additional
financing. There can be no assurance that the Company's existing capital
resources, together with the net proceeds from this offering and future
operating cash flows, will be sufficient to fund the Company's future
operations. The Company's capital requirements will depend on numerous
factors, including the expense of market introduction of the Targis System in
the United States, the cost involved in protecting the proprietary rights of
the Company, the cost involved in maintaining regulatory approval for the
Targis System, the time and cost involved in expanding manufacturing capacity,
the cost of establishing marketing, distribution, training and technical
support networks and the effectiveness of these and other commercialization
activities. Financing production of the Targis System in quantities necessary
for commercialization will require a significant investment in working
capital. This need for working capital is likely to increase to the extent
that demand for the Targis System increases. In addition, should the Company
choose to lease Targis System control units to customers, substantial capital
could be required to finance the lease arrangements. Although the Company may
finance part or all of the capital requirements associated with these leasing
arrangements through equipment financing with a commercial lender, the Company
has not yet obtained a commitment for such equipment financing. If the Company
requires additional funding, there is no assurance that such funding will be
available on acceptable terms, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Dependence Upon Key Employees. The Company is dependent upon a number of key
management and technical personnel. The Company's ability to manage its
transition from the development stage to a commercial entity will depend in
large part on the efforts of these individuals. The Company's success will
also depend on its ability to attract and retain additional highly qualified
management, marketing and sales, and technical personnel. The Company faces
intense competition for qualified personnel, and there can be no assurance
that the Company will be able to attract and retain such personnel. The loss
of the services of one or more members of management or the inability to hire
additional personnel as needed could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Employees" and "Management."
Possible Issuances of Undesignated Shares; Anti-Takeover Provisions. The
Board of Directors of the Company is authorized to issue up to 5,000,000
undesignated shares of capital stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the Company's shareholders. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any undesignated shares that may be issued in
the future. The issuance of undesignated shares could have the effect of
delaying,
10
<PAGE>
deferring or preventing a change in control of the Company, which could deprive
the Company's shareholders of opportunities to sell their shares of Common
Stock at a premium. The Company's Board of Directors is divided into three
classes serving staggered three-year terms. The staggered terms of directors
may limit the shareholders' ability to change control of the Company even if a
change in control were in the shareholders' interest. Additionally, the Company
has in place a shareholder rights plan, which could have the effect of
discouraging tender offers or other transactions which could result in
shareholders receiving a premium over the market price of Common Stock. The
Company is also subject to provisions of the Minnesota Business Combination Act
and the Minnesota Control Share Acquisition Act that make certain business
combinations more difficult. See "Description of Capital Stock."
Possible Volatility of Stock Price. There have been significant fluctuations
in the market price for the Company's Common Stock. Factors such as
announcements of variations in revenues or earnings or achievements of
regulatory milestones by the Company or its competitors could cause the market
price of the Common Stock to fluctuate substantially. In addition, the stock
market has experienced price and volume fluctuations that have particularly
affected companies in the health care market, resulting in changes in the
market price of the stock of many companies which may not have been directly
related to the operating performance of those companies. Such broad market
fluctuations may adversely affect the market price of the Common Stock. See
"Price Range of Common Stock."
Immediate and Substantial Dilution. Purchasers of shares of Common Stock in
this offering will incur immediate and substantial dilution in the net tangible
book value of their purchased shares of Common Stock (approximately $16.32 per
share), at an assumed offering price of $22.19 per share. Investors may also
experience additional dilution as a result of the exercise of outstanding stock
options. See "Dilution."
No Dividends. The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying such dividends for the foreseeable future.
See "Dividend Policy."
THE COMPANY
The Company was incorporated in Minnesota in 1991. The Company's executive
offices are located at 14405 21st Avenue North, Minneapolis, Minnesota 55447,
and its telephone number is (612) 475-1400.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby, at an assumed offering price of $22.19 per
share, are estimated to be approximately $30.8 million ($35.5 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company intends to use the net proceeds from this offering
to fund the United States commercial market launch of the Company's Targis
System, including expansion of the Company's sales and marketing force; to
expand manufacturing capacity to support expected product demand in the United
States and internationally; to support general corporate expansion in support
of United States distribution activities; to continue research and development
efforts related to the Targis System, including lowering manufacturing costs,
developing product enhancements and new applications for the Company's
technologies and funding continued clinical studies to further support the
long-term safety and efficacy of the Targis System.
The balance of the net proceeds will be used for working capital and other
general corporate purposes. The amount and timing of the expenditures of the
net proceeds for these purposes depends on numerous factors, including the
status of the Company's product development efforts, competition, market
acceptance of the Company's Targis System and any other products introduced by
the Company. The Company has no current plans to introduce any other products
in the foreseeable future. The Company may also use a portion of the net
proceeds to acquire complementary businesses, products or technologies,
although the Company has no agreements and is not involved in any negotiations
with respect to any such transactions. Pending such uses, the Company plans to
invest the net proceeds from this offering in short-term, investment-grade,
interest-bearing securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
12
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company completed an initial public offering of its Common Stock on May
30, 1996 and its shares are publicly traded on the Nasdaq National Market
under the symbol "ULGX." The following table sets forth the high and low
closing prices of the Company's Common Stock for the periods indicated as
reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1996
Fourth Quarter................................................. $16.50 $12.75
FISCAL YEAR 1997
First Quarter.................................................. $15.75 $10.38
Second Quarter................................................. $16.50 $13.25
Third Quarter.................................................. $19.88 $15.00
Fourth Quarter................................................. $18.13 $12.63
FISCAL YEAR 1998
First Quarter.................................................. $23.75 $16.00
Second Quarter (through October 15, 1997)...................... $25.25 $22.13
</TABLE>
On October 3, 1997, the Company had 236 shareholders of record. On October
15, 1997, the last reported sales price of the Common Stock on the Nasdaq
National Market was $22.19 per share.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company presently expects to retain its earnings to
finance the development and expansion of its business. The payment by the
Company of cash dividends, if any, on its Common Stock in the future is
subject to the discretion of the Board of Directors and will depend on the
Company's earnings, financial condition, capital requirements and other
relevant factors. See "Description of Capital Stock."
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 and as adjusted to reflect the receipt and application of the
estimated net proceeds from the sale of shares of Common Stock pursuant to
this offering at an assumed offering price of $22.19 per share.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, less current maturities....... $ 38 $ 38
Shareholders' equity(1):
Undesignated stock; $.01 par value, 4,750,000 shares au-
thorized, no shares issued or outstanding ............. -- --
Series A Junior Participating Preferred Stock; 250,000
shares authorized, no shares issued or outstanding..... -- --
Common stock; $.01 par value, 25,000,000 shares autho-
rized, 9,256,593 shares outstanding actual, 10,756,593
shares outstanding as adjusted......................... 92 107
Additional paid-in capital............................... 59,131 89,900
Accumulated deficit...................................... (26,767) (26,767)
Net unrealized loss on investments....................... (59) (59)
-------- --------
Total shareholders' equity............................. 32,397 63,181
-------- --------
Total capitalization................................. $ 32,435 $ 63,219
======== ========
</TABLE>
- --------
(1) Excludes outstanding options to purchase 973,737 shares of Common Stock as
of June 30, 1997 at a weighted average exercise price of $5.47 per share
under the Company's 1991 Stock Option Plan. The Company's shareholders
will consider a proposal at the Annual Meeting on November 19, 1997 to
increase the number of shares of Common Stock reserved for issuance under
the 1991 Stock Option Plan by 400,000 shares.
14
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997 was $32.4
million, or $3.50 per share of Common Stock outstanding. Net tangible book
value per share represents the total amount of the Company's shareholders'
equity, less intangible assets, divided by 9,256,593 shares of Common Stock
outstanding.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of this offering. After giving
effect to the sale of 1,500,000 shares of Common Stock in this offering at an
assumed offering price of $22.19 per share and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company as of June 30, 1997 would have been $63.2 million or $5.87 per share.
This represents an immediate increase in net tangible book value of $2.37 per
share to existing shareholders and an immediate dilution in net tangible book
value of $16.32 per share to purchasers of Common Stock in this offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................ $22.19
Net tangible book value per share at June 30, 1997............... $3.50
Increase per share attributable to new investors................. 2.37
Pro forma net tangible book value per share after the offering..... 5.87
------
Net tangible book value dilution per share to new investors........ $16.32
======
</TABLE>
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of June 30, 1996 and 1997 and for
the three fiscal years ended June 30, 1997 have been derived from the
financial statements of the Company which have been audited by Arthur Andersen
LLP, independent public accountants, whose report appears elsewhere in this
Prospectus. The following selected financial data as of June 30, 1993, 1994
and 1995 and the two years ended June 30, 1994 are derived from audited
financial statements not included herein. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales........................... $ 164 $ 9 $ 489 $ 362 $ 5,504
Cost of goods sold.............. 254 179 785 1,177 4,866
------- ------- ------- ------- -------
Gross profit (loss)............. (90) (170) (296) (815) 638
Costs and expenses:
Research and development........ 1,478 1,598 4,099 4,811 5,049
Sales and marketing............. 22 124 477 1,007 3,430
General and administrative...... 468 677 884 1,192 2,226
------- ------- ------- ------- -------
Total costs and expenses........ 1,968 2,399 5,460 7,010 10,705
------- ------- ------- ------- -------
Operating loss.................. (2,058) (2,569) (5,756) (7,825) (10,067)
Interest income, net............ 61 44 329 232 1,833
------- ------- ------- ------- -------
Net loss........................ $(1,997) $(2,525) $(5,427) $(7,593) $(8,234)
======= ======= ======= ======= =======
Net loss per common share(1).... $ (0.91) $ (1.22) $ (0.90)
Shares used in computing net
loss per common share(1)....... 5,996 6,235 9,173
<CAPTION>
JUNE 30,
-------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale securities.. $ 2,004 $ 9,093 $ 3,571 $40,844 $26,101
Working capital................. 1,930 8,897 3,372 39,940 27,013
Total assets.................... 2,487 9,801 4,876 42,368 35,582
Total shareholders' equity...... 2,065 9,393 3,977 40,588 32,397
</TABLE>
- --------
(1) Computed on the basis described for net loss per common share in Note 2 of
Notes to Financial Statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Urologix, Inc., incorporated in May 1991, has been engaged primarily in
developing its proprietary Targis System to treat BPH; conducting clinical
trials for the Targis System; seeking various regulatory approvals necessary
to market the Targis System; and producing Targis Systems for sale outside the
United States. Regulatory approvals necessary to market the Targis System in
Canada, Japan and the 15 European Union countries were obtained in fiscal year
1997. In August 1997, the Company also received FDA approval to market the
Targis System in the United States and intends to launch the Targis System in
the United States during the fourth calendar quarter of 1997. The Company's
Targis System consists of a control unit and a procedure kit, which includes
the microwave delivery system incorporated in a catheter, a cooling bag and a
rectal thermosensing unit. The Company's revenues to date consist primarily of
Targis System sales to its two international distributors.
The Company intends to market the Targis System through a direct sales force
in the United States. Internationally, the Company has developed broad-based
relationships with two parties for market development and sales of the Targis
System. Boston Scientific, a worldwide developer, manufacturer and marketer of
medical devices, has exclusive distribution rights for the Targis System in
all countries outside the United States, except Japan. Nihon Kohden, a major
Japanese developer, manufacturer and marketer of medical devices, has
exclusive distribution rights in Japan for the Targis System.
Since inception, the Company has experienced operating losses and
anticipates that its operating losses will continue for the foreseeable
future. Expenditures will be primarily related to the Targis System market
introduction in the United States, scale-up of commercial manufacturing,
clinical trials and research and development activities.
The Company expects sales of the Targis System to account for all of its
revenues for the foreseeable future. In the United States, the Company intends
to offer urologists the option to purchase or lease the Targis System control
unit. The leases will either be offered under a third-party reimbursement
leasing arrangement or directly from the Company. Revenues from the sale of
Targis System control units and disposable procedure kits will be recognized
upon shipment.
RESULTS OF OPERATIONS
Fiscal Years Ended June 30, 1997 and 1996
Sales increased to $5.5 million in fiscal year 1997 from $362,000 in fiscal
year 1996 due to sales of the Targis System to the Company's international
distributors following marketing approvals obtained during fiscal 1997 in the
European Union and Japan. Following United States FDA marketing approval of
the Targis System in August 1997, the Company expects sales to increase in
fiscal 1998.
Cost of goods sold includes costs incurred in connection with the production
of Targis Systems, including manufacturing and quality assurance overhead.
Costs of goods sold increased to $4.9 million in fiscal year 1997 from $1.2
million in fiscal year 1996 due primarily to the increase in sales of the
Targis System. The Company expects further increases in cost of goods sold as
sales increase and production capacity is increased in anticipation of the
United States launch of the Targis System. If sales of the Targis System
increase, the Company expects costs of goods sold, as a percent of sales, to
decrease due to efficiencies obtained from higher production volumes.
17
<PAGE>
Research and development expenses include those costs associated with the
development and protection of the Company's Targis System intellectual
property, treatment of patients participating in clinical trials, the
accumulation of outcome data to substantiate clinical results and the
preparation and submission of applications for regulatory approvals. These
costs increased slightly in fiscal 1997 over fiscal 1996 due primarily to
costs associated with the filing of the PMA for the Targis System with the FDA
and clinical studies conducted to establish the safety and efficacy of the
Targis System. Research and development expenses are expected to increase in
fiscal 1998 due to continuing clinical study expenses and product development
projects to further develop the Company's technologies.
Sales and marketing expenses increased to $3.4 million in fiscal 1997 from
$1.0 million in fiscal 1996, due primarily to costs associated with the
marketing launch of the Targis System in Europe and Japan and preparation for
the United States marketing launch. These preparations included the hiring of
sales and marketing management, preparation of promotional materials,
recruitment of field sales representatives and efforts related to obtaining
third-party reimbursement for the Targis System. The Company expects sales and
marketing expenses to increase significantly as it commercially launches the
Targis System in the United States and continues supporting its international
distributors' sales efforts.
General and administrative expenses increased to $2.2 million in fiscal 1997
from $1.2 million in fiscal 1996 due to administrative costs associated with
an increase in employees in connection with the Company's growth and
commencement of sales activities, and costs related to the Company's external
reporting obligations as a public company.
Interest income increased significantly during fiscal year 1997, due
primarily to income from the investment of proceeds from the Company's initial
public offering, completed in June 1996.
Fiscal Years Ended June 30, 1996 and 1995
Sales decreased to $362,000 in fiscal 1996, from $489,000 in fiscal 1995,
due primarily to a higher number of Targis Control Units being placed in
clinical sites and reimbursed in 1995 than in 1996.
Cost of goods sold increased to $1.2 million for fiscal 1996 from $785,000
for fiscal 1995 due to increased production levels, expansion costs incurred
in preparation for commercial sales of the Targis System and costs related to
bringing the Company's manufacturing process into compliance with ISO 9001
standards.
Research and development expenses increased to $4.8 million for fiscal 1996
from $4.1 million in fiscal 1995. The increase was the result of several
factors, including increased contract development expenditures to upgrade the
Targis System to its latest generation; higher employee compensation due to
the addition of technical and supervisory personnel, an increase worldwide in
the number of patients treated; and additional submissions to the FDA of
certain Targis System Investigational Device Exemption ("IDE") supplements.
Sales and marketing expenses increased to $1.0 million for fiscal 1996 from
$477,000 for fiscal 1995, due primarily to the establishment of a sales office
in the United Kingdom during the latter part of fiscal 1995. The Company
closed this sales office during fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through sales of
equity securities and, to a lesser extent, sales of the Targis System to its
distributors. Through June 30, 1997, the Company had received approximately
$59.0 million in net proceeds from equity financings. During fiscal 1997, the
Company used approximately $11.5 million of cash for operating activities and
property and equipment purchases funded primarily by proceeds from the sale of
available-for-sale securities. As of June 30, 1997, the Company had total
cash, cash equivalents and available-for-sale securities of $26.1 million, and
working capital of $27.0 million.
18
<PAGE>
In August 1996, the Company entered into a worldwide license agreement with
EDAP under which EDAP granted Urologix a non-exclusive license for certain
EDAP patents relating to the microwave treatment of BPH. Although the terms of
the license agreement are confidential, they include an initial license fee as
well as prepaid and ongoing royalty payments, subject to a maximum royalty.
The Company expects to continue to incur additional losses, and will require
additional working capital, as it incurs substantial expenses related to the
Targis System market introduction in the United States, expansion of
manufacturing capacity, clinical trials and research and development
activities. In addition, should the Company choose to lease Targis System
control units to customers, substantial capital could be required to finance
the lease arrangements. Although the Company may finance part or all of the
capital requirements associated with these leasing arrangements through
equipment financing with a commercial lender, the Company has not yet obtained
a commitment for such equipment financing. Although the Company believes that
existing cash, cash equivalents and available-for-sale securities will be
sufficient to fund its operations for at least the next 12 months, there can
be no assurance that the Company will not require additional financing in the
future or that any additional financing will be available to the Company on
satisfactory terms, if at all.
19
<PAGE>
BUSINESS
OVERVIEW
Urologix develops, manufactures and markets minimally invasive medical
devices for the treatment of urological diseases. The Company's initial
product, the Targis System, is designed to treat benign prostatic hyperplasia
("BPH"), commonly known as "enlarged prostate." BPH dramatically affects the
quality of life of millions of men often by causing adverse changes in urinary
voiding patterns. The Targis System has been approved for marketing in the
United States, the 15 European Union countries, Japan and Canada. The Company
is currently selling the Targis System outside the United States, through
distributors and intends to begin marketing the Targis System in the United
States through its direct sales force in the fourth calendar quarter of 1997.
The Targis procedure is a non-surgical, catheter-based therapy that uses a
proprietary microwave technology that preferentially heats diseased areas of
the prostate to a temperature sufficient to cause cell death, while
simultaneously cooling and protecting the pain-sensitive urethral tissue.
Because the urethra is protected from heat and is not punctured or penetrated,
a Targis procedure can be performed without general or regional anesthesia or
intravenous sedation. Accordingly, the procedure can be performed in a low-
cost setting such as a physician's office or an outpatient clinic. The Company
believes that the Targis System provides an efficacious, safe and cost-
effective procedure for the treatment of BPH without the complications and
side effects inherent in most current treatments, and as such, is well
positioned to address the needs of physicians, patients and payors.
The Company's clinical studies demonstrated that most patients who received
the Targis therapy experienced a significant improvement in BPH symptoms and
urine flow rates, minimal complications and post-treatment discomfort, and
were able to return to normal activities within a few days. As of August 1,
1997, 755 patients affected with BPH have been treated with the Company's
Targis System in controlled clinical studies, including 46 patients with
three-year follow-up data. The Company submitted results of its clinical
studies to the United States Food and Drug Administration (the "FDA") in its
premarket approval application ("PMA") in February 1997 and subsequently
received FDA approval to market the Targis System in August 1997.
The Company will market the Targis System in the United States with a direct
sales force. Beginning with the hiring of its Executive Vice President of
Sales and Marketing in February 1997, the Company has developed a sales and
marketing team consisting of a director of marketing and a director of North
American sales, geographic marketing managers, product managers, communication
specialists and direct domestic sales representatives, who are all dedicated
to marketing the Targis System. To date, the Company has hired and trained
three sales representatives and is actively recruiting additional sales
representatives. Outside the United States, the Company has developed broad-
based relationships with two parties for market development and sales of the
Targis System. Boston Scientific Corporation ("Boston Scientific"), a
worldwide developer, manufacturer and marketer of medical devices, markets the
Targis System in all countries outside the United States, except Japan. Nihon
Kohden Corporation ("Nihon Kohden"), a major Japanese developer, manufacturer
and marketer of medical devices, markets the Targis System in Japan. Both
Boston Scientific and Nihon Kohden have marketing and sales specialists
dedicated to the Targis System.
BENIGN PROSTATIC HYPERPLASIA
BPH is a non-cancerous urological disease in which the prostate enlarges and
constricts the urethra. Symptoms associated with BPH affect the quality of
life of millions of sufferers worldwide and BPH can lead to irreversible
bladder or kidney damage. The prostate is a walnut-size gland surrounding the
male urethra (the channel that carries urine from the bladder out of the body)
that is located just below the bladder and adjacent to the rectum. The
prostate produces seminal fluid and plays a key role in sperm
preservation and transportation. While the actual cause of BPH is not fully
understood, it is known that as
20
<PAGE>
men reach middle age, cells within the prostate that are located primarily
lateral, medial and anterior to the urethra (the "transition zone") begin to
grow at an increasing rate. As the transition zone of the prostate expands, it
compresses or impinges upon other portions of the prostate gland and the
urethra, thereby restricting the normal passage of urine. This constriction of
the urethra may require a patient to exert excessive bladder pressure to begin
urination. If the patient cannot generate sufficient force to adequately void
urine from the bladder, the possibility of infection and bladder and kidney
damage increases. BPH patients also typically suffer from a variety of
troubling symptoms, which primarily relate to changes in urinary voiding and
may have a significant impact on a patient's quality of life. These symptoms
include:
. increased frequency of urination . stopping and starting of flow
duringthe day and night during urination
. sudden urge to urinate . weak flow of urine
. difficulty in starting urination . sensation of incompleteness in
emptying of the bladder
The American Urological Association ("AUA") has developed and statistically
validated a system of evaluating and monitoring BPH symptom severity called the
AUA Symptom Score. This score is composed of the sum of the patient's responses
to seven questions generally relating to the symptoms described above. The
patient ranks a symptom on a scale of 0-5, with 5 being most severe. The Agency
for Health Care Policy and Research ("AHCPR") has recommended that patients
with a total score of less than 8 not be considered candidates for BPH
treatment of any kind. A patient with a total score of 8 to 19 is considered to
have moderate symptoms of BPH, and a patient with a total score of 20 or
greater is classified as having severe symptoms. Other methods of diagnosing
BPH and its severity include measuring urinary flow rates (a ratio of the
volume of urine voided to duration of voiding expressed in milliliters per
second), pressure flow data (intravesical pressure required to urinate) and
residual urine in the bladder after voiding.
Following is a diagram of the anatomy affected by BPH:
[Diagram of Transverse Section
Normal Prostate]
[Drawing of partial human male
anatomy, including bladder, prostate,
rectum and urethra]
[Diagram of BPH Prostate]
21
<PAGE>
Evidence of BPH typically begins to appear in men in their 50s, and by age
70, the quality of life of most men is negatively affected by BPH symptoms.
Medical sources estimate that the percentage of men suffering from symptoms of
BPH is approximately 30% for men in their 50s and increases to more than 75%
for men over age 80. The following chart sets forth the Company's estimates of
the number of men, both in the United States, and in Europe, Japan and Canada,
who suffer moderate to severe symptoms of BPH and reduced urine flow rates,
and the approximate number of men who elected to pursue treatment for their
symptoms in 1996:
<TABLE>
<CAPTION>
EUROPE, JAPAN
MALE POPULATION UNITED STATES AND CANADA TOTAL
- --------------- ------------- ------------- -----------
<S> <C> <C> <C>
Over age 50 .......................... 31 million 90 million 121 million
Moderate to severe BPH symptoms and
reduced urine flow rates ............ 6 million 17 million 23 million
Treated for BPH ...................... 1.7 million 1.7 million 3.4 million
</TABLE>
Because BPH is an age-related disorder, the number of men with moderate to
severe symptoms of BPH is expected to double in the United States by the year
2020 as a result of the aging population. The Company expects similar
increases to occur worldwide. Total BPH related expenditures in the United
States are currently estimated to be approximately $3 billion annually.
Outside the United States, BPH expenditures are currently estimated at $5
billion annually. Europe and Japan are estimated to account for 70% of the BPH
treatment market outside the United States.
With the introduction of drug therapies, which cause fewer complications
than surgery, as well as substantial advertising by pharmaceutical companies,
the number of men receiving treatment has grown dramatically over the last few
years. As the above table indicates, however, the vast majority of men with
moderate to severe symptoms of BPH and reduced urine flow rates have elected
to live with the symptoms of this chronic disease rather than pursue any of
the currently available treatments. The Company believes the percentage of men
with moderate to severe symptoms of the disease who seek treatment will
increase in the future as a result of increased awareness of the disease and
the development of treatments, like the Targis System, that are less invasive
and result in less severe complications and side effects than traditional
treatments.
BPH THERAPIES AND THEIR LIMITATIONS
Historically, over 70% of men suffering moderate to severe symptoms of BPH
in the United States have elected to live with the discomfort and
inconvenience of the disease, an approach known as "watchful waiting." This
has been due primarily to a lack of understanding of the disease and
limitations of existing therapies. For many BPH sufferers, watchful waiting
may represent only a temporary option due to the significant impact BPH has on
a patient's quality of life. Of those receiving treatment in the United
States, approximately 85% elect drug therapy and approximately 15% elect
surgical intervention. The Company believes that many health care payors have
encouraged watchful waiting or drug therapy over surgical intervention due in
large part to the costs and potential complications of surgical therapies.
Drug Therapy
Drug therapy for BPH has been available in the United States since the FDA
approved marketing of four orally administered pharmaceutical products--
Proscar (sold by Merck & Co., Inc.) in 1992, Hytrin(R) (sold by Abbott
Laboratories) in 1993, Cardura(R) (sold by Pfizer Inc.) in 1995 and FLOMAX(R)
(sold by Boehringer Ingelheim Pharmaceuticals, Inc.) in 1997. Drug therapy was
used by approximately 1.5 million men in the United States in 1996 for the
treatment of BPH symptoms. The Company believes the dramatic acceptance of
drug therapy in the short period since FDA approval is due to extensive drug
company marketing, resulting in increased patient awareness, and the desire of
these patients for effective treatments which have less severe complications
and side effects than currently available surgical
22
<PAGE>
procedures. The annual cost of drug therapy is approximately $1,300 to $1,400
in the first year, and the typical total cost ranges from $12,000 to $17,000,
depending on the age of the patient when drug therapy is initiated. Drug
therapy requires daily administration for the duration of the patient's life.
Alpha blockers, such as Hytrin(R), Cardura(R), and FLOMAX(R) treat BPH by
relaxing the muscles in the prostate and bladder neck to relieve urethral
obstruction. While alpha blockers have demonstrated some ability to relieve a
patient's BPH symptoms and improve urine flow rates, they still carry the
potential for significant side effects such as dizziness, headache, asthenia
(shortness of breath) and fatigue. Proscar(R) is designed to treat BPH by
shrinking the prostate. As much as six months of Proscar(R) treatment may be
necessary to determine efficacy and, after 12 months, at least 40% of patients
taking Proscar(R) do not experience an increase in urine flow rate or improved
AUA symptom scores. Side effects for Proscar(R) include impotence and
decreased libido. An estimated 30% to 40% of those patients who initially
pursue drug therapy discontinue treatment within 12 months due to various
reasons including ineffectiveness, side effects and the burdens of compliance
and cost.
Surgical Treatments for BPH
Surgical treatments for BPH typically use various means to completely remove
the prostatic urethra along with a substantial portion of the diseased tissue
within the prostate. Approximately 1.0 million prostatic surgeries were
performed worldwide in 1995, of which 216,000 were performed in the United
States. The reimbursement of a prostatic surgery ranges from approximately
$7,000 to $12,000 in the United States. Because the average age of a patient
undergoing prostatic surgery in the United States is 66, Medicare is the
primary payor for these surgeries. The current average Medicare reimbursement
for surgery and associated complications is approximately $8,600.
The most common surgical procedure for the treatment of BPH is TURP, whereby
a rigid instrument is inserted into the patient's urethra through which the
surgeon passes an electrosurgical loop that is used to remove the urethra and
the diseased tissue within the prostate. While TURP has been the established
standard for treating BPH since the 1930s, this procedure requires general or
spinal anesthesia and almost always requires post-treatment hospitalization.
The Company estimates approximately 800,000 TURPs were performed worldwide in
1995, making it the second most common surgical procedure performed on men
over age 55. During the past several years, the number of TURPs performed
worldwide has been decreasing, which the Company believes is due to increased
awareness of the complications of surgery and the availability of drugs as an
alternative treatment. While TURP results in a dramatic improvement in urine
flow in 90% of the patients and a reduction in the AUA Symptom Score in 85% of
the patients, a significant number of patients experience serious
complications. Virtually all patients experience a burning sensation upon
urination that lasts for up to three weeks following the procedure. Other
complications, as reported by AHCPR, include retrograde ejaculation--the
reverse flow of semen--(73.4% of patients), infection (15.5%), impotence
(13.6%), excessive hemorrhaging requiring transfusion (12.5%), immediate
surgery to stop the bleeding (2.0%), long-term incontinence (3.1%) and
urethral stricture (3.1%). In addition, approximately 1.5% of TURP patients
die as a result of the procedure and related complications. The TURP procedure
requires a highly skilled surgeon with extensive training, and the incidence
of these complications may be affected by the experience of the surgeon
performing the TURP. At least 10% of TURP patients develop BPH symptoms again
and require retreatment within five years.
Other surgical techniques have been developed in an attempt to address the
complications and side effects of TURP. The three most prevalent procedures
are: (i) transurethral incision of the prostate ("TUIP"); (ii) transurethral
vaporization of the prostate ("TVP"); and (iii) laser assisted prostatectomy.
TUIP is a surgical procedure performed under general or spinal anesthesia,
whereby a surgical cutting tool is passed through a cystoscope in the urethra
to make one or more incisions in the prostatic urethra near the bladder neck,
thereby reducing urethral obstruction. TVP is a surgical procedure performed
under general or spinal anesthesia, similar to a TURP, except the
electrosurgical element is a tissue vaporizing cylinder or ball rather than a
loop. TVP removes the prostatic urethra and vaporizes and coagulates
23
<PAGE>
prostatic tissue, thereby widening the channel for urinary flow. Laser
assisted prostatectomy includes two similar procedures--visual laser ablation
of the prostate ("V-LAP") and contact laser ablation of the prostate ("C-
LAP"), in which a laser fiber catheter is guided through a cystoscope and used
to ablate and coagulate the prostatic urethra and prostatic tissue. Recently,
studies have been conducted using holmium lasers to surgically remove the
prostatic urethra and tissue. While these alternative surgical treatments have
been effective in reducing some side effects associated with a TURP, such as
reduced risk of blood loss, they still remove or damage the urethra, require
general or regional anesthesia and are performed in an operating room.
Less-Invasive BPH Treatments
In an effort to eliminate hospitalization and the complications arising from
surgical treatments, other technologies have been developed or are under
development for the treatment of BPH. Two of these technologies are
interstitial radio frequency therapy ("RF"), which is being marketed in the
United States, and interstitial laser therapy, which is in clinical trials and
has not yet been commercialized in the United States. In an interstitial
therapy procedure, a rigid scope is inserted into the patient's urethra and
either needle electrodes or laser fibers pierce the urethra and are advanced
into the lobes of the prostate. RF or laser energy is then delivered, causing
necrosis of the surrounding tissues. Due to the limited amount of tissue
necrosis caused by each electrode or laser fiber, multiple punctures of the
urethra are required during this procedure in order to coagulate a sufficient
amount of tissue. The Company believes that a highly trained and skilled
physician is required to make judgments regarding the number and depth of
punctures and to effectively perform the procedure. While these procedures are
designed to be performed in approximately 30 to 45 minutes using local
anesthesia, the Company believes that intravenous sedation or regional
anesthesia will be required in addition to local anesthesia in most patients
due to the need to repeatedly puncture the urethra and manipulate the large,
rigid instrument within the urethra. As a result, the Company believes that it
will be difficult to consistently perform interstitial therapies in an office
setting.
Other technologies to treat BPH have been developed or are under various
stages of development, including stents, dilatation balloons, transurethral
and transrectal hyperthermia and high intensity focused ultrasound. See "--
Competition."
THE UROLOGIX APPROACH
The Targis System is a non-surgical, catheter-based technology to treat BPH.
The Targis System utilizes a proprietary microwave technology, delivered
through a flexible catheter, that preferentially heats the diseased area of
the prostate to a temperature sufficient to cause cell death, while
simultaneously cooling and protecting the pain sensitive urethral tissue. The
Targis procedure does not require punctures or incisions, thereby leaving the
urethra intact. As a result, the procedure can be performed without general or
regional anesthesia or intravenous sedation. Consequently, the procedure has
been, and is expected to be, performed in an outpatient setting and does not
require an overnight hospital stay. Unlike other FDA-approved microwave-based
systems, the Company's Targis System employs proprietary preferential heating
to target energy away from the rectum and impedance matching to maximize
energy delivery to the diseased prostatic tissue. In addition, the Targis
System's Control Unit is substantially smaller than other microwave-based
systems and thus more easily transportable. The Company believes that this
will make the Targis System easier to use in outpatient settings, which are
generally less costly than operating rooms.
The Company's clinical studies demonstrated that most patients who received
the Targis procedure experienced a significant improvement in AUA Symptom
Scores and urine flow rates, minimal complications and post-treatment
discomfort, and were able to return to normal activities within a few days.
24
<PAGE>
BUSINESS STRATEGY
The Company's objective is to be a leader in the design, development and
commercialization of clinically effective solutions for urological disorders.
To date, Urologix has focused on developing the Targis System for treating
BPH. The following are the key elements of the Company's strategy:
Focus on the Large and Growing Urology Market. The Company will develop
minimally invasive, cost-effective solutions to urological problems. The
urological market is a highly fragmented market with expenditures of at least
$14 billion annually worldwide and is expected to experience rapid growth due
to the aging population. Many of the currently available treatments are
inadequate for the disorders they address and as a result there are
significant unmet needs in the market. The Company believes a major
opportunity exists for it to build a business around designing, developing and
commercializing innovative products for the treatment of urological disorders.
Develop a Domestic Direct Sales Organization and Build Upon Strong Clinical
Relationships Worldwide. Most major urological procedures are performed by
urologists. There are approximately 7,500 urologists practicing in the United
States. The Company believes that this relatively small number of physicians
affords it a unique opportunity to develop a cost-effective direct sales
effort. Accordingly, the Company has retained all the sales and marketing
rights to its products in the United States and is developing a sales and
marketing team consisting of experienced marketing and sales professionals.
The Company has hired an Executive Vice President of Sales and Marketing and
is currently hiring and training its domestic sales force in preparation for
the United States product launch. In its sales and marketing efforts, the
Company intends to utilize the strong relationships it has established with
its clinical investigators and medical advisory board to accelerate the market
acceptance of its products.
Partner with Physicians to Increase Acceptance of the Targis System. The
Company intends to work closely with physicians who use the Targis System and
assist them in educating their patients on the benefits of the system,
obtaining reimbursement and measuring clinical outcome data. The Company
intends to provide physicians with informational and educational materials to
facilitate obtaining publicity and enabling presentations in the community.
Urologix has also devoted resources and has developed expertise in
reimbursement, enabling the Company to advise and assist the physician in
obtaining reimbursement for Targis procedures. Urologix will also make
available to Targis System users a Clinical Outcome Data Management System by
which physicians will be able to track patient outcomes. This data will be
used to support reimbursement and refine expectations of a Targis treatment.
By assisting the physician in educating and informing a large audience of
potential patients, efficiently obtaining reimbursement and capturing clinical
data, Urologix believes it can increase the acceptance and utilization of the
Targis System as a preferred treatment for BPH.
Establish and Enhance Strategic Partnerships. The Company has established
broad-based relationships for market development and sales of the Targis
System in Japan with Nihon Kohden, and for all countries outside the United
States and Japan, with Boston Scientific. The Company works closely with
Boston Scientific and Nihon Kohden to maximize market awareness and
penetration of the Targis System. The Company may pursue strategic corporate
partnerships with these or other medical device manufacturers and marketers to
assist the Company in commercializing its technology and for other corporate
purposes.
Maintain Technological Leadership and Protect Technology Advantages through
Patents. The Company's strategy is to be a technological leader in the
urological market. Urologix believes that the Targis System enjoys performance
advantages over alternative BPH treatment methods. These advantages derive
from the Company's core technologies, including preferential heating and
antenna design. The Company intends to continue to invest substantial
resources in research, development and clinical testing programs. The Company
spent approximately $5.0 million in fiscal 1997 and expects to continue to
commit significant resources in the future for research and development.
Urologix aggressively seeks to
25
<PAGE>
protect its proprietary technology by filing patent applications throughout
the world, as appropriate. The Company has been issued twelve United States
patents, some of which cover the key aspects of the Targis System, and has
pending applications for foreign protection and twenty additional United
States patents.
TARGIS SYSTEM
The Company's Targis System consists of the Targis Control Unit and the
Targis Procedure Kit, which includes the Targis Catheter, Cooling Bag and
Rectal Thermosensing Unit ("RTU"). The Targis Control Unit contains the
microwave generator, a solid-state refrigerant device, a circulation pump and
electronic circuitry to monitor therapy. The Targis Control Unit supplies
microwave energy and coolant to the Targis Catheter and collects and processes
data from the Targis Catheter and the RTU. The Targis Catheter contains a
microwave antenna for delivering microwave energy to the prostate and a
thermosensor for monitoring the urethral temperature. The Coolant Bag holds
the coolant that is circulated during therapy. The RTU monitors rectal
temperatures. The Targis Catheter, Coolant Bag and RTU are single-use devices.
In a Targis procedure, the Targis Catheter is inserted into the urethra and
the RTU is inserted into the rectum. Chilled water is then circulated through
the catheter. The coolant is designed to lower the temperature of the urethra
to protect it from heat and discomfort. When the urethra is sufficiently
cooled, the microwave energy is turned on. Temperatures in the urethra and
rectum are monitored continuously to ensure that the appropriate level of
energy is supplied. The targeted prostatic tissue that is sufficiently heated
by the microwave energy is necrosed. Following treatment, a small catheter is
inserted and the patient is released. The small catheter is typically left in
place for two to four days to drain urine while swelling subsides. Following
necrosis of the prostatic tissue, pressure on the urethra is decreased and BPH
symptoms are reduced.
[A diagram of the Company's Targis Catheter
inserted in the urethra, showing the location of
the bladder, prostate, transition zone, urethra, balloon
in bladder, microwave antenna, the area of preferential
heating and the area of the urethra cooling.]
26
<PAGE>
The exposure time required to produce cell death decreases exponentially
with increasing temperatures. Virtually all cells heated to above 45(degrees)C
for one hour will die. As temperatures increase above 45(degrees)C, the time
required for cell death decreases. The challenge to providing effective
microwave therapy relates to producing and maintaining adequate temperature
elevation in the diseased tissue while, at the same time, preventing excessive
thermal exposure to the urethra and the rectum, as well as the internal and
external urinary sphincters. Protection against injury to the rectum is
particularly important, as serious complications could occur should the rectum
be thermally damaged. Protection of the urethra is important because it
decreases the pain associated with the procedure and shortens recovery time.
In addition, protection of the external and internal urinary sphincters
maintains urinary continence and may preserve ejaculatory function.
Continuous energy delivery is required to most effectively necrose diseased
tissue in the prostate and thereby relieve BPH symptoms. The prostate is
highly vascularized and, in response to increased temperature, blood supply
within the prostate is dramatically increased during therapy. This produces an
efficient heat sink which reduces the temperature in the prostate beneath the
temperature threshold required for cell death within only a few minutes after
microwave energy is discontinued. In order to prevent damage to the rectum,
FDA guidelines provide that rectal temperatures not exceed 42.5(degrees)C. If
this temperature is exceeded, FDA guidelines mandate that microwave energy be
discontinued to allow the rectal temperature to decrease. Because of the
time/temperature relationship to cell death, a decrease in temperature in the
prostate below the threshold for cell death during the treatment has a
diminished effect on treatment outcome.
The Company's Targis System addresses these challenges through a unique
integration of the following proprietary technologies.
Transurethral Microwave Heating and Catheter Cooling
A specially designed antenna within the Targis Catheter radiates microwave
energy, at approximately 915 MHz, preferentially into the prostatic tissue.
The tissue absorbs this energy, and heat is inductively generated to increase
tissue temperature above 45(degrees)C. Meanwhile, chilled water is circulated
through outer channels in the catheter to draw heat away from the surface of
the urethra, thereby cooling it and protecting it from damage. This
combination of inductive microwave heating and conductive urethral cooling
results in a temperature pattern which varies in a predictable and
controllable way within the prostate, starting relatively low at the urethral
surface, increasing in temperature rapidly within the prostate and then
decreasing toward the capsule at the perimeter of the gland.
The Company's human clinical studies demonstrated that the Targis procedure
produced and maintained an extensive zone within the prostate which exceeded
45(degrees)C and consistently produced tissue necrosis in all patients
evaluated. Because of urethral cooling, however, the temperature close to the
urethra was only slightly elevated. The Targis System is designed to maintain
urethral temperatures below 45(degrees)C during the Targis procedure, thus
providing a crucial barrier to pain and allowing the procedure to be
accomplished in a physician's office or outpatient setting without the need
for general or regional anesthesia or intravenous sedation. In addition, post-
therapy recovery is improved as compared to existing surgical procedures
because the urethra remains intact.
Preferential Heating and Continuous Energy Delivery
Because the rectum is located close to the prostate, some of the thermal
energy from the heated prostate conducts into the rectal tissue. Serious
complications could result from significant temperature increases to the
rectal tissue; therefore, the prostate tissue closest to the rectum must be
prevented from reaching temperatures that could be damaging. The Company has a
patented technology that enables the delivery of microwave energy in a
radially preferential fashion. This is employed to direct a greater amount of
energy toward the anterior and lateral regions of the prostate than toward the
rectum. With the use of preferential heating, limitations on heat delivery
into the prostate imposed by the proximity of the
27
<PAGE>
prostate to the rectum are minimized. The Company's Targis System is designed
to continuously deliver greater amounts of energy to the diseased areas of the
prostate, resulting in sustained higher temperatures in these areas, a larger
area of cell death and thus a more effective treatment.
The Targis System is designed to maintain rectal temperatures beneath the
FDA's guideline of 42.5(degrees)C. Only on rare occasions in the Company's
clinical trials has a patient's rectal temperature reached 42.5(degrees)C. In
the event that this limit is reached, the Targis System is designed to
automatically shut off microwave power until the rectal temperature returns to
an acceptable level. Attempts by others to use microwave energy non-
preferentially to heat the prostate have been hindered by frequent elevation
of rectal temperatures which cause treatment to be temporarily suspended until
rectal temperatures decrease.
Impedance Matching and Heat Generation
Transfer of microwave energy from the antenna in the Targis Catheter to the
prostate tissue is affected by the balance between the electrical impedance of
the antenna and the tissue surrounding it. Without adequate matching of the
antenna to its environment, a large portion of the electrical energy can be
reflected back through the antenna cable instead of being radiated to the
prostate as intended, which may cause two compromising effects. The reflection
of microwave energy may cause radiant emissions to occur along the
transmission cable and could result in temperature elevation to areas outside
the target tissue in the prostate. More importantly, a mismatched system may
result in the antenna generating resistive heat. This heat is absorbed by the
cooling channels within the catheter, thereby diminishing the catheter's heat
carrying capacity. This can be important because changes to the temperature of
the catheter's cooling fluid result in urethral temperature changes. The
Targis System addresses these problems by diminishing the amount of energy
reflected and therefore maximizing the radiation of energy in the prostate by
matching the electrical impedance of the antenna with the surrounding tissue
for each patient prior to treatment.
Controlled Energy Delivery
The Targis Catheter utilizes a helical shaped antenna, which produces an
electrical field that is confined to a region of the prostate gland closely
related to the antenna length. Beyond the antenna's boundaries, the electrical
field strength drops rapidly, thus little induced heat is generated beyond the
length of the antenna. Within its length, the field is generally uniform,
resulting in uniform heat induction along the antenna length. This ensures
effective control over the zone of tissue damage and provides better assurance
against injury to the internal or external urinary sphincters, which could
affect ejaculation and urinary control.
CLINICAL STATUS
As of August 1, 1997, 755 patients affected with BPH had been treated with
the Targis System in controlled clinical studies. These patients were treated
at 20 clinical sites in the United States, Europe, Canada and South America.
The primary endpoints of the Company's clinical trials were to reduce the
patient's AUA Symptom Scores, increase flow rate during urination and improve
the patient's quality of life, with minimal complications.
Data were collected prior to treatment, and at six weeks, three months, six
months, nine months (AUA & quality of life questionnaire only), one year, two
years and three years post-treatment. The clinical results discussed below
reflect the data from 630 patients treated with the Targis System in
controlled clinical studies with a standard clinical treatment as of August 1,
1997. The remaining 125 patients not included below were enrolled in (i)
feasibility studies to determine temperature distribution in the prostatic
tissue and evaluate patient tolerance and other treatment parameters or (ii)
studies with alternative protocols to determine the ability of the Targis
procedure to effectively treat patients with urinary retention or other
urinary conditions. Improvements in AUA Symptom Scores, peak flow rates and
quality of life were statistically significant compared to initial pre-
treatment scores. However, there can be no assurance that future clinical
results will be consistent with those achieved to date.
28
<PAGE>
Clinical Results
LOWER AUA SYMPTOM SCORES. The following chart demonstrates the change in AUA
Symptom Scores for 577 patients who received the standard clinical treatment.
The chart excludes data from 53 patients (8%) whose treatments were recent and
for whom six-week follow up data are not yet available. The results
demonstrated that the Targis System was effective in reducing AUA Symptom
scores by 58% at three months and that the results were maintained for at
least three years (p(LESS THAN)0.001).
[GRAPH]
AUA
SCORE 20.4 11.3 8.5 8.6 8.5 9.1 8.4
INITIAL 6 WEEK 3 MONTH 6 MONTH 12 MONTH 24 MONTH 36 MONTH
N=577 N=577 N=559 N=499 N=387 N=146 N=46
TIMEPOINT/# OF PATIENTS
INCREASED FLOW RATES. The following chart demonstrates the change in peak
flow rates for 491 patients who received the standard clinical treatment. The
chart excludes data from 139 patients (22%) whose treatments were recent and
for whom six-week follow up data are not yet available, or for whom initial
peak flow data were not collected, or for patients who did not have a voided
urine volume of at least 125 milliliters required for the study. These data
demonstrated that the Targis procedure increased peak flow rates for patients
with a mean increase of over 4 ml/sec at three months (p(LESS THAN)0.001) and
that the flow rate increase was maintained from the three month to the three
year time point.
[GRAPH]
ML/SEC 7.7 10.8 11.9 12.1 11.7 11.3 12.5
N=491 N=491 N=460 N=405 N=306 N=117 N=41
INITIAL 6 WEEK 3 MONTH 6 MONTH 12 MONTH 24 MONTH 36 MONTH
TIMEPOINT/# OF PATIENTS
29
<PAGE>
QUALITY OF LIFE. The Company has patient quality of life data from the 385
patients from whom the Company has received one-year follow-up data. These
patients were asked a statistically validated quality of life assessment
question to evaluate how they would feel living the rest of their life with
their current BPH symptoms. At 12 months following their Targis procedures,
75% of these patients indicated they would be satisfied, an increase from only
4% giving the same response prior to treatment.
MINIMAL COMPLICATIONS. Of the 573 patients from whom the Company has
received follow-up data, no patient needed an anesthetist or anesthesia
services during the treatment, and 88% of the patients spent one day or less
in bed following the Targis treatment. Of these 573 patients, there were no
cases of long-term incontinence, impotence or significant bleeding resulting
from the Targis procedure. Thirteen percent of patients experienced urinary
retention which required catheterization for more than one week. All of these
cases were resolved within 30 days. Additionally, 8% of the patients
experienced an episode of urinary tract infection which was treated and
resolved with routine antibiotic therapy, and less than 1% experienced
urethral stricture requiring intervention. Other minor complications included
epididymitis (4%), loss of ejaculate (4%), and transient urinary incontinence
(3%).
SALES AND MARKETING
The Company's marketing strategy includes (i) conducting and reporting the
results of controlled clinical studies of the Targis System with leading
clinical investigators around the world, (ii) demonstrating the cost
effectiveness of the Targis System to governmental and commercial payors, and
(iii) educating urologists and BPH patients on the safety, efficacy and other
benefits of the Targis System.
United States
The Company will sell its Targis System in the United States through a
direct sales force. Urologix is planning to initiate a product launch by the
end of calendar 1997. Beginning with the hiring of its Executive Vice
President of Sales and Marketing in February 1997, the Company has developed a
sales and marketing team, consisting of a director of marketing and a director
of North American sales, geographic marketing managers, product managers,
communication specialists and direct domestic sales representatives, who are
all dedicated to marketing the Targis System. The Company is currently hiring
and training its sales force in preparation of the product launch. To date,
the Company has hired and trained three sales people and is actively
recruiting additional sales representatives. As of September 30, 1997, the
Company employed a total of 20 individuals in its sales and marketing
department.
Of the over 7,500 urologists in the United States, the Company intends to
target urologists who practice in high-volume prostate treatment groups and
urologists who are opinion leaders in BPH treatment methods. The Company
believes that the demographics of urologists and their practices in the United
States will allow for an effective direct selling strategy.
In the United States, the Company intends to offer urologists the option to
purchase or lease the Targis System Control Unit. The list prices for the
purchase of a Control Unit and Procedure Kit are $150,000 and $1,200,
respectively.
International
The Company has developed broad-based relationships with Nihon Kohden and
Boston Scientific for market development and sales of the Targis System in
Japan and all other foreign countries outside Japan, respectively. Both
companies have dedicated marketing and sales specialists for the Targis
System.
The Company entered into an international distribution agreement with Boston
Scientific in 1996. Under the agreement, Boston Scientific was granted
exclusive distribution rights for the Company's Targis System in all countries
outside the United States and Japan for a period of five years ending in 2001.
Under
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the agreement, Boston Scientific agreed to purchase certain minimum numbers of
the Company's Control Units and Procedure Kits. Prior to entering into this
distribution agreement, Boston Scientific made equity investments in the
Company.
In 1994, the Company entered into a distribution agreement with Nihon Kohden
which granted Nihon Kohden exclusive distribution rights for the Company's
Targis System in Japan for a term ending in the year 2000. Nihon Kohden has
agreed to purchase certain minimum numbers of the Company's Control Units and
Procedure Kits under the agreement. Nihon Kohden made an equity investment in
the Company concurrently with entering into this distribution agreement.
MANUFACTURING
The Company's Targis System consists of the Targis Control Unit and the
Targis Procedure Kit, which includes the Targis Catheter, Cooling Bag and
Rectal Thermosensing Unit. The Targis Control Unit is currently manufactured
by SeaMED Corporation ("SeaMED") of Seattle, Washington to the Company's
specifications under a supply agreement that expires in February 1999. SeaMED,
a contract manufacturer for various medical device companies, has a
manufacturing facility in which it produces Class III medical devices.
Currently, the Company manufactures a key component of the Targis Control
Unit, the microwave generator, and provides it to SeaMED for incorporation
into the final Targis Control Unit. Although the Company expects that SeaMED
will be able to adequately meet demand for the Targis Control Unit on a timely
basis for the foreseeable future, there can be no assurance that this will be
the case.
The Targis Procedure Kits are assembled by the Company, using materials and
components supplied to the Company by various subcontractors and suppliers, as
well as components fabricated by the Company. Several of the components are
currently available to the Company through only one vendor. Wherever possible
and practical, the Company intends to develop alternative sources for every
critical component. Where alternative sourcing is not possible, the Company
intends to enter into supply agreements with each component provider.
Nevertheless, failure to obtain components from such providers or delays
associated with any future component shortages, particularly as the Company
increases its manufacturing activities in preparation for commercial
distribution of the Targis System in the United States, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In an effort to ensure that adequate space is available for expanding
commercial production, since June 1996, the Company has expanded its
facilities from 12,000 square feet to over 20,000 square feet and increased
its controlled environment production space by over fifty percent. In
addition, the Company intends to expand its facility in the next 18 months.
Also, the Company has implemented multi-shift production capabilities and
systems to establish back-up manufacturing capacity. As of September 30, 1997,
the Company employed 38 individuals in its manufacturing department.
If sales of the Targis System increase, the Company expects cost of goods
sold, as a percent of sales, to decrease due to efficiencies obtained from
higher production volumes. To further improve performance, the Company has
expanded its manufacturing engineering group and started initiatives to
improve production yields through the use of several methods, including total
quality management and statistical process control. The Company is also
working closely with its suppliers to continuously improve quality and reduce
costs.
The Company's manufacturing operations must comply with the FDA's quality
system regulation, which includes, but is not limited to, the FDA's GMP
requirements, and with certain requirements of state, local and foreign
governments, which establish requirements for assuring quality by controlling
components, processes and document traceability and retention, among other
things. In June 1997, the FDA conducted its initial inspection of the
Company's manufacturing facility, in which the Company's
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facility, documentation and quality control systems were determined to be
satisfactory and no deficiencies of GMP were raised with the Company. The
Company's facilities will also be subject to unscheduled inspections by the
FDA and scheduled inspections by other auditors. The Company believes that its
manufacturing and quality control procedures meet the requirements of these
regulations, and has established training and self-audit systems designed to
ensure compliance. See "--Government Regulation--United States."
The Company has received ISO 9001 certification indicating compliance of the
Company's manufacturing facilities with European standards for quality
assurance and manufacturing process control. The Company has also received CE
mark certification, which allows it to affix the CE Mark to its product and
market it in the European Union. In addition, the Targis System has been
approved for marketing by the Japanese Ministry of Health and Welfare. See "--
Government Regulation--International."
RESEARCH AND DEVELOPMENT
The Company intends to build upon its clinical knowledge and relationships
to develop innovative future generations of BPH and other urology products.
The Company's research and development efforts are currently focused on
improving the function and features of the Targis System, reducing the
production cost of the components in the Targis System and investigating other
applications for its technologies. This effort includes development of
enhanced components of the Targis Procedure Kit. The Company also believes
that its core technologies may have other medical applications for prostatic
diseases, including malignancies.
During the fiscal years ended June 30, 1995, 1996 and 1997 the Company spent
$4.1 million, $4.8 million, and $5.0 million respectively, in its research and
development efforts. As of September 30, 1997, the Company employed 12
individuals in its research and development department.
THIRD-PARTY REIMBURSEMENT
The Company believes that third-party reimbursement will be essential to
commercial acceptance of the Targis procedure, and that overall cost
effectiveness and physician advocacy will be keys to obtaining such
reimbursement. The Company believes that the Targis procedure can be performed
for a substantially lower total cost than surgical treatments for BPH or
continuous drug therapy. Consequently, the Company believes that third-party
payors seeking procedures that provide quality clinical outcomes at a lower
cost will reimburse the Targis procedure.
The Company's strategy for obtaining reimbursement in the United States is
to obtain appropriate reimbursement codes and perform outcome studies in
conjunction with clinical studies to establish the cost effectiveness of the
Targis procedure as compared to surgical and drug treatments for BPH. The
Company plans to use this information when approaching health care payors to
obtain reimbursement authorizations.
In the United States, the Company estimates that 60% to 80% of patients who
receive a Targis treatment will be eligible for Medicare coverage. The
remaining patients will either be covered by private insurers, including
traditional indemnity health insurers and managed care organizations, or
private-paying patients.
The United States Health Care Financing Administration ("HCFA"), which
establishes coverage policies for Medicare carriers, can either make national
coverage reimbursement determinations or allow local Medicare carriers to
adopt, modify or ignore model reimbursement policies. The Company believes
that HCFA will not make a national coverage decision for transurethral
microwave therapy for BPH in the foreseeable future and therefore, local
Medicare carriers will each make their own coverage decisions regarding
coverage of microwave therapy for BPH. Based on communications with various
local Medicare
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carriers, the Company believes that coverage for transurethral microwave
therapy for BPH is currently available in over 30 states. In addition, a group
of medical directors from local Medicare carriers, known as the Medicare
Carrier Urology Workgroup, has outlined a model policy for coverage of
transurethral microwave therapy for BPH and has recommended that Medicare
carriers adopt the model policy. The Company believes that as more clinical
data are published, HCFA may make a national coverage decision for
transurethral microwave therapy for BPH. Despite these indications and
recommendations, there can be no assurance that reimbursement will be
available to providers.
For those states where coverage is available from the Medicare carrier,
physicians' professional fees will be reimbursed for performing a Targis
procedure based on a Current Procedural Terminology ("CPT") code. CPT codes
are established by the American Medical Association's CPT Editorial Panel.
This Panel approved the addition of a CPT code for physicians to use when
submitting claims for performing transurethral microwave therapy in November
1996, and recommended a work value, which will be used to determine the amount
reimbursed for the CPT code in February 1997. This code is expected to be
published in the 1998 CPT book. The Company believes that the existence of
this code will make it easier for physicians to adopt the Targis procedure.
Reimbursement for hospitals by Medicare intermediaries (Medicare
administrators for hospitals) for the cost of the Targis System and other
costs related to a Targis procedure (other than the physician's professional
fee) will be cost-reimbursed when submitted by hospitals to the Medicare
intermediary. HCFA is currently revising its reimbursement methodology to
allow for reimbursement of supplies and other costs related to certain
procedures performed by physicians in their offices. Should these revisions be
implemented, the Company believes that physicians will be reimbursed by
Medicare for costs related to performing a Targis procedure in their office.
Private insurance companies and HMOs make their own determinations regarding
coverage and reimbursement based upon "usual and customary" fees established
for CPT codes.
There can be no assurance that the Company will receive favorable coding,
coverage and reimbursement determinations for its Targis System from Medicare
and other payors or that amounts reimbursed to physicians for performing a
Targis procedure will be sufficient to encourage physicians to use the
Company's Targis System. See "Risk Factors."
Internationally, reimbursement approvals for the Targis procedure will be
sought on an individual country basis. Some countries currently have
established reimbursement authorizations for transurethral microwave therapy.
Reimbursement approvals have been obtained through Nihon Kohden Corporation
for the Targis System in Japan. Recently the largest private health insurer in
the United Kingdom, British United Provident Association ("BUPA"), announced
its intention to begin reimbursing providers that use thermotherapy, such as
the Targis System, for the treatment of BPH. BUPA provides health insurance
for approximately 50% of United Kingdom patients who maintain private
coverage. The Company and its marketing partner, Boston Scientific, are
actively pursuing reimbursement approvals on a country-by-country basis
throughout Western Europe. Clinical studies and physician advocacy will be
used to support reimbursement requests in countries where there is currently
no reimbursement for such procedures.
PATENTS AND PROPRIETARY RIGHTS
The Company has aggressively pursued protection of its intellectual
property. The Company has been issued 12 United States patents and has 20
patent applications pending in the United States. The Company also has applied
for patent coverage in a number of foreign jurisdictions. The Company either
filed or is preparing to file international applications under the Patent
Cooperation Treaty ("PCT") for qualifying United States applications and is
now pursuing the national phase in designated PCT countries for the Company's
first four applications.
The United States patents issued to the Company claim methods and devices
which the Company believes are critical to providing a safe and efficacious
treatment for BPH. Several of the claims under these
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patents relate to devices and methods for preferentially limiting the amount
of microwave energy directed toward the rectum. Because cell death is a
function of time and temperature and because the rectum is in close proximity
to the prostate, the Company believes preferential heating is critical to
enable continuous delivery of energy to achieve an adequate zone of necrosis
to durably treat BPH while not endangering the rectum.
The Company also has several issued patents and pending applications
relating to its gamma-matched, helical-dipole microwave antenna. For a
microwave antenna to radiate energy efficiently, it must be impedance matched
to its environment. Further, the antenna design controls the evenness of the
heating and the area to be heated. The Company has two issued patents covering
various designs and methods of its helical microwave antenna with impedance
matching.
There can be no assurance that these patents, or any patents that may be
issued as a result of existing or future applications, will offer any degree
of protection from competitors or that any of the Company's patents or
applications will not be challenged, invalidated or circumvented in the
future. In addition, there can be no assurance that competitors, many of which
have substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to manufacture or market its
Targis System in the United States or in international markets. Further, there
can be no assurance the Company's Targis System does not infringe upon the
patent rights or other intellectual property rights of other companies, that
the Company will not be required to seek licenses from other companies or that
other companies will not pursue claims of infringement against the Company.
Other companies have developed or are in the process of developing medical
methods and devices to transurethrally treat BPH with microwave energy.
Several companies have applied for, and in some cases received, patents
related to such medical methods and devices. One company, BSD Medical
Corporation ("BSD"), initiated a patent infringement lawsuit against the
Company in 1992. The Company chose to settle that lawsuit in March 1994 by
entering into a settlement agreement with BSD, under which BSD granted the
Company a license for the patent at issue, as well as several other patents.
The Company and BSD are currently in litigation concerning the settlement
agreement. The Company believes that the BSD allegations are without merit.
See "Risk Factors" and "--Legal Proceedings."
In August 1996, the Company entered into a non-exclusive, worldwide patent
license agreement with EDAP TMS S.A., a French corporation, and its
subsidiary, EDAP Technomed, Inc. (collectively referred to as "EDAP") for
certain EDAP patents relating to the microwave treatment of BPH.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, through proprietary information agreements with
employees, consultants and other parties. The Company's proprietary
information agreements with its employees and most of its consultants contain
industry standard provisions requiring such individuals to assign to the
Company, without additional consideration, any inventions conceived or reduced
to practice while retained by the Company, subject to customary exceptions.
The Company's officers and other key employees also agree not to compete with
the Company for a period following termination. There can be no assurance that
proprietary information or non-compete agreements with employees, consultants
and others will not be breached, that the Company would have adequate remedies
for any breach, or that third parties will not nonetheless gain access to the
Company's technology.
COMPETITION
Competition in the market for BPH treatments is intense and is expected to
increase. The Company believes that its principal competition will come from
both surgical and non-surgical therapies. Surgical therapies include TURP,
TUIP or alternative surgical procedures for vaporization of the prostate
tissue using laser or RF energy. Non-surgical alternatives include drug
therapy and emerging less invasive technologies.
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The primary manufacturer of equipment used in the TURP procedure is
ValleyLab, a subsidiary of Pfizer, Inc. In addition, Trimedyne, Inc., C.R.
Bard, Inc., Coherent, Inc., Surgical Laser Technologies, Inc., Circon
Corporation, Richard Wolf GmbH, Karl Storz GmbH & Company and ProSurg Corp.
all manufacture equipment used in alternative surgical procedures. Drugs for
the treatment of BPH are marketed by Abbott Laboratories (Hytrin(R)), Merck &
Co., Inc. (Proscar(R)), Pfizer, Inc. (Cardura(R)) and Boehringer Ingelheim
Pharmaceuticals, Inc. (FLOMAX(R)). Companies that have developed or are
developing less invasive interstitial therapies include Johnson & Johnson,
Dornier Medical Systems, Inc., Diomed Ltd., VidaMed, Inc. and U.S. Surgical
Corporation. Other companies have developed or are developing less invasive
microwave thermotherapy systems for the treatment of BPH include EDAP, BSD and
Dornier Medical Systems, Inc. The Company is aware of additional companies
that have developed or are developing technologies for the treatment of BPH,
including Boston Scientific Corporation, InStent Inc., a subsidiary of
Medtronic, Inc., Argomed, Inc., Cheung Laboratories, Inc., Thermal
Therapeutics, Inc. and FOCUS Surgery, Inc. These technologies include stents,
dilatation balloons, transurethral and transrectal hyperthermia, and high
intensity focused ultrasound.
The Company expects that competition in the BPH field will be based, among
other things, on the ability of the therapy to provide safe, effective and
lasting treatment, cost effectiveness of the therapy, acceptance of the
procedure by physicians, health care payors and patients, patent position,
marketing and sales capabilities, and third-party reimbursement policies.
Another factor in competition may be the timing of market introduction of
competitive products.
GOVERNMENT REGULATION
United States
Government regulation in the United States and other countries is a
significant factor in the development and marketing of the Company's Targis
System and in the Company's ongoing manufacturing and research and development
activities. The Company and the Targis System are regulated in the United
States by the FDA under a number of statutes including the Federal Food, Drug,
and Cosmetic Act ("FDC Act"). Pursuant to the FDC Act, the FDA regulates the
pre-clinical and clinical testing, manufacturing, labeling, distribution,
sale, marketing, advertising and promotion of medical devices in the United
States. Failure to comply with applicable requirements can result in fines,
recall or seizure of products, total or partial suspension of production,
distribution, sales and marketing, suspension or withdrawal of existing
product approvals or clearances, refusals to approve or clear new applications
or notices and criminal prosecution of a company and its officers and
employees.
Prior to commercial sale in the United States, most medical devices,
including the Company's products, must be cleared or approved by the FDA. In
general, the regulatory process can be lengthy, expensive and uncertain, and
securing FDA clearances or approvals may require the submission of extensive
clinical data together with other supporting information to the FDA. Medical
devices such as the Targis System are classified into one of three classes,
Class I, II or III, on the basis of the controls necessary to reasonably
ensure their safety and effectiveness. Generally, Class III devices are those
that must receive approval of a PMA by the FDA to ensure their safety and
effectiveness. The PMA process ordinarily requires the performance of at least
two independent, statistically significant clinical studies that must
demonstrate the safety and effectiveness of the device in order to obtain FDA
approval of the PMA. The PMA process is expensive and often lengthy, typically
requiring several years, and may never result in approval.
In 1993, the FDA issued a policy statement indicating that medical devices
seeking to be labeled for use in treatment of BPH would be classified as Class
III devices requiring FDA approval of a PMA before marketing may begin. The
Company's Targis System is a Class III device for which a PMA had to be filed
with and approved by the FDA before the product could be marketed. The FDA
approved the PMA for the Targis System by a letter (order) dated August 22,
1997. As approved, the Targis System is indicated
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to relieve symptoms associated with BPH in men with prostatic lengths of 30 to
50 millimeters. The FDA made the Targis System a restricted device which means
that its labeling specifies requirements for the training of physicians who
may use the device and that the FDA has greater control over advertising for
the Targis System. The FDA imposed a number of post-approval requirements,
including a study to collect 5-year follow-up data to evaluate the long-term
effects of the Targis System treatment in at least 100 patients. This post-
approval study must assess the rates of adverse events that occurred during
the 5-year follow-up period, as well as the rate of repeat and alternative
treatments that were administered. Failure of the Company to comply with these
and other post-approval requirements could result in the FDA withdrawing its
approval of the PMA for the Targis System. The Company intends to comply with
all post-approval requirements. Once it is marketed, the Targis System will be
subject to continual FDA and other regulatory agency review and regulation.
Subsequent discovery of previously unknown problems or failure to comply with
applicable requirements can result in severe administrative, civil, and
criminal sanctions.
The FDA's regulations require agency approval of a PMA supplement prior to
marketing for certain changes if they affect the safety and effectiveness of
the device. Such changes include but are not limited to: new indications for
use; the use of a different facility or establishment to manufacture, process
or package the device; changes in manufacturing methods or quality control
systems; changes in vendors used to supply components of the device; changes
in performance or design specifications; and certain labeling changes. When
clinical data are required to obtain FDA approval of a PMA supplement, such as
in the event of a change in the indication for use of the Targis System, the
Company will be required to obtain an investigational device exemption ("IDE")
to gather the data. Approval of such an IDE could not be assured on a timely
basis, or at all. There can be no assurance that the required approvals of PMA
supplements for any changes to the Targis System will be granted on a timely
basis or at all, and delays in receipt of, or failure to receive such
approvals, or the loss of the approval of the PMA for the Targis System, would
have a material adverse effect on the business, financial condition and
results of operations of the Company.
In 1995, the FDA issued a policy statement indicating that general medical
use lasers used specifically for the treatment of BPH are eligible for
marketing through 510(k)s, a significantly less burdensome regulatory pathway
than PMAs. Products under development by several of the Company's competitors
are covered by this 1995 policy statement.
Advertising and promotional activities are subject to regulation by the FDA
and, in certain instances, by the Federal Trade Commission. Other applicable
requirements include the FDA's medical device reporting regulations, which
require that the Company provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its marketed devices,
as well as product malfunctions that would likely cause or contribute to a
death or serious injury if the malfunction were to recur.
The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company to demonstrate and maintain compliance
with the FDA's quality system regulations which include GMP requirements, as
specified in the FDA device quality system ("QS") regulation. This regulation
requires, among other things, that (i) the manufacturing process be regulated,
controlled, and documented by the use of written procedures and (ii) the
ability to produce devices which meet the manufacturer's specifications be
validated by extensive and detailed testing of every aspect of the process.
The regulation also requires investigation of any deficiencies in the
manufacturing process or in the products produced and detailed record keeping.
In addition, the QS regulation requires preproduction design controls,
purchasing controls and maintenance of service records, except that FDA has
stated that as long as manufacturers are taking reasonable steps to come into
compliance with the design control requirements, the FDA will not initiate
action (including enforcement cases) based on a failure to comply with these
requirements before June 1, 1998. The QS regulation is expected to increase
the cost of complying with the FDA GMP and related requirements. The FDA
monitors compliance with QS including GMP requirements by conducting periodic
unannounced inspections of manufacturing facilities. If violations of the
applicable regulations are noted during FDA inspections of manufacturing
facilities, the FDA or the government through court enforcement action can
prohibit further manufacturing,
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distribution, sale and marketing of the device until the violations are cured,
if ever, and in that circumstance the continued marketing of the Company's
products would be adversely affected. Such regulations are subject to change
and depend heavily on administrative interpretations. There can be no
assurance that future changes in regulations or interpretations made by the
FDA or other regulatory bodies, with possible retroactive effect, will not
adversely affect the Company.
International
Sales of medical devices outside of the United States are subject to United
States export requirements and foreign regulatory requirements. Exportation of
a device that complies with FDA requirements for commercial distribution in
the United States is not subject to any FDA export permit requirement so long
as the device is exported for the indication(s) for which commercial
distribution in the United States is lawful under the FDC Act.
Although the Company has met the necessary registration requirements in
Japan, the European Union and Canada to commercialize the Targis System in
these countries, the Company's Targis System has not been approved for
commercial sale in most other jurisdictions outside the United States. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time required to obtain approval by a foreign country may be
longer or shorter than that required for FDA approval, and the requirements
may differ. The Company has implemented ISO 9001, a certification showing that
the Company's procedures and manufacturing facilities comply with standards
for quality assurance and manufacturing process control. The ISO 9001
certification, along with the European Medical Device Directive ("MDD")
certification, received in early fiscal 1997, evidences compliance with the
requirements and enables the Company to affix the CE Mark to its current
products. The CE Mark denotes conformity with European standards for safety
and allows certified devices to be placed on the market in all EU countries.
After June 1998, medical devices may not be sold in EU countries unless they
display the CE Mark. There can be no assurance that the Company will be able
to obtain regulatory approvals or clearances for its products in other foreign
countries.
The Company's distributor in Japan, Nihon Kohden, is responsible for
obtaining regulatory and reimbursement approvals for the Targis System in
Japan. In February 1997, Nihon Kohden received regulatory approval from the
Japanese Ministry of Health and Welfare.
PRODUCT LIABILITY AND INSURANCE
The business of the Company entails the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
any such claims could have an adverse impact on the Company. The Company
maintains product liability insurance with coverage of $1.0 million per
occurrence and an annual aggregate maximum of $2.0 million. The Company also
carries a $10.0 million umbrella insurance policy. The Company evaluates its
insurance requirements on an ongoing basis. There can be no assurance that
product liability claims will be covered by such insurance, will not exceed
such insurance coverage limits or that such insurance will be available on
commercially reasonable terms, or at all.
EMPLOYEES
As of September 30, 1997, the Company employed 100 individuals on a full-
time basis. The Company believes that it has been successful in attracting
experienced and capable personnel, although there can be no assurance that the
Company will continue to attract and retain qualified personnel. None of the
Company's employees is covered under a collective bargaining agreement. The
Company considers relations with its employees to be good.
BACKLOG
Although the Company has received orders for future delivery of its products
at September 1, 1997, the Company did not have a significant backlog.
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PROPERTIES
The Company leases approximately 20,000 square feet of office, manufacturing
and warehouse space in a suburb of Minneapolis, Minnesota. The lease
expiration date is March 31, 2002. The Company has exercised an option to
acquire additional space at the same location. The Company believes its
facilities will be sufficient to meet the Company's current requirements and
that additional space at or near the current location will be available at a
reasonable cost if such space is required in the future.
LEGAL PROCEEDINGS
On July 30, 1996, the Company filed a lawsuit under seal in United States
District Court for the District of Minnesota against BSD to enforce the terms
of the BSD Settlement Agreement, which includes a patent license. In June
1996, BSD accused the Company of breaching a confidentiality provision of the
BSD Settlement Agreement, and notified the Company that BSD was terminating
the BSD Settlement Agreement. The Company initiated the lawsuit against BSD
seeking a declaratory judgment that the Company had not breached the
confidentiality provision of the BSD Settlement Agreement, and that the BSD
Settlement Agreement remained in full force and effect. BSD answered the
Company's complaint and counterclaimed for a declaratory judgment of breach
and termination of the BSD Settlement Agreement. The formal discovery period
in the lawsuit has closed and the case is currently set for trial no later
than April 1998. The Company believes that it has fully complied with the BSD
Settlement Agreement and intends to continue complying with the BSD Settlement
Agreement. The Company believes that BSD's allegations and purported
termination of the BSD Settlement Agreement are without merit. See "Risk
Factors."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mitchell Dann.................. 37 Chairman of the Board
Jack E. Meyer(1)............... 54 Director, President and Chief Executive Officer
John P. Costello............... 41 Executive Vice President, Sales and Marketing
Wesley E. Johnson, Jr.......... 39 Vice President, Finance, Chief Financial Officer, Secretary
and Treasurer
Jonathan R. McGrath............ 43 Vice President, Research and Development
David W. Powell................ 40 Vice President, Operations
W. Allen Putnam................ 50 Vice President, Regulatory and Quality
Buzz Benson(1)................. 43 Director
Janet G. Effland(1)(2)......... 49 Director
Michael R. Henson(2)........... 51 Director
Paul A. LaViolette(1)(2)....... 40 Director
Robert R. Momsen(2)............ 50 Director
David C. Utz, M.D.............. 73 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Dann was a co-founder of the Company, has served as a director since its
inception in 1991 and served as acting President from June 1993 to January
1994. He became Chairman of the Board in March 1993. Mr. Dann is currently
President of M. Dann & Co., Inc., a venture capital advisory firm. Prior to
M. Dann & Co., Mr. Dann co-founded and held the position of Managing Partner
at IAI Venture Capital Group, the venture capital division of Investment
Advisers, Inc. Mr. Dann has served as a director of several private companies
and is currently a director of Cardiovascular Dynamics, Inc.
Mr. Meyer has been the President, Chief Executive Officer and a director of
Urologix since January 1994. Prior to joining Urologix, Mr. Meyer served as
President and Chief Executive Officer of FiberOptic Sensor Technologies, Inc.,
a medical device company, from March 1993 to January 1994. From January 1992
to March 1993, Mr. Meyer was President and Chief Executive Officer of
Carelink, Inc., a medical device company. From December 1982 to August 1991,
Mr. Meyer held the positions of Chief Operating Officer and Executive Vice
President at Quest Medical, Inc., a medical device company. Mr. Meyer
currently is a director of BestWay, Inc.
Mr. Costello has served as Executive Vice President, Sales and Marketing for
the Company since February 1997. Prior to joining Urologix, Mr. Costello
served as Vice President of Sales and Marketing for FemRx, Inc. and
Cardiovascular Imaging Systems, Inc. over the past four years. In addition,
Mr. Costello served as Vice President of Sales for the Critical
Care/Angioplasty division of Baxter Healthcare.
Mr. Johnson has been the Vice President of Finance and Chief Financial
Officer of Urologix since September 1995. He was also elected Secretary in
March 1996 and was elected Treasurer in December 1996. Prior to joining
Urologix, Mr. Johnson served as Vice President, Finance and Chief Financial
Officer of Orthofix Inc., formerly American Medical Electronics, Inc., from
December 1986 to September 1995.
Mr. McGrath has been the Vice President of Research and Development for
Urologix since October 1994. Prior to joining Urologix, Mr. McGrath served as
Vice President of Research and Development of Schneider USA from March 1990 to
September 1994. Prior to 1990, Mr. McGrath co-founded Harbor Medical Devices,
where he served as Vice President from February 1987 to February 1990. In
addition,
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Mr. McGrath has held various positions at Medi-Tech, Inc., Ladd Medical, Inc.,
and Ladd Research Industries, Inc.
Mr. Powell has served as Vice President, Operations for the Company since
September 1996. From 1991 through May 1996, Mr. Powell served in a variety of
positions of increasing responsibility with Gymania Corporation and certain
related companies including Playpal Inc. and Playpal Sales Corporation. Each
of the latter two companies was engaged in the business of international
sales, design and technical service of large commercial creative play
structures. During this time, Mr. Powell was asked to serve as President of
Playpal Inc., a financially troubled Florida corporation. Mr. Powell became
President of Playpal in approximately March 1995 and continued as its
President until Playpal filed a petition for Chapter 11 protection in
approximately May 1996. Subsequent to Mr. Powell's resignation, Playpal filed
a petition for bankruptcy under Chapter 7 in late 1996. From 1988 to 1991, Mr.
Powell was Vice President, Operations for Vitaphore Corporation, a medical
device company. From 1980 to 1988 Mr. Powell held various positions with
Baxter Healthcare and American Hospital Supply Corporation.
Mr. Putnam has been the Vice President, Regulatory and Quality for Urologix
since October 1994 and was Vice President of Operations from December 1993 to
October 1994. Before joining Urologix, Mr. Putnam served as President and
Chief Operating Officer of Uroplasty, Inc. from June 1992 to November 1993.
Uroplasty was a wholly-owned subsidiary of Bioplasty, Inc., a breast implant
company, and both companies filed for Chapter 11 bankruptcy protection in
April 1993. Mr. Putnam also held the position of Vice President of Quality
Assurance and Regulatory Affairs at St. Jude Medical, Inc. from December 1989
to June 1992. In addition, Mr. Putnam has held various positions at Bio-
Vascular, Inc., Minnetonka, Inc., Hollister Corporation, and Baxter Travenol
Laboratories, Inc.
Mr. Benson has served as a director of the Company since August 1992. Mr.
Benson has been the Managing Director of Piper Jaffray Ventures since November
1992 and is a Partner in the Piper Jaffray Healthcare Funds, a series of
venture capital funds focused on investments in emerging companies in the
health care industry. From November 1988 to November 1992, Mr. Benson was a
Managing Director in the corporate finance department of Piper Jaffray Inc.
Mr. Benson is also a director of Exogen, Inc., a medical device company, and
several privately held medical companies.
Ms. Effland has served as a director of the Company since July 1994. Since
1988, Ms. Effland has been a General Partner and Vice President of Patricof &
Co. Ventures, Inc. Prior to joining Patricof & Co., Ms. Effland was the
managing director of a portfolio of United States investments for CIN
Investment Company. From 1974 to 1984, Ms. Effland served as Vice President of
Qume Corporation and Courier Terminal Systems, Inc., both subsidiaries of ITT
Corporation. Ms. Effland is also a director of CYTYC Corporation, a medical
diagnostics equipment company, and several privately held medical companies.
Mr. Henson has served as a director of the Company since September 1991. Mr.
Henson has served as President, Chief Executive Officer and Chairman of the
Board of Cardiovascular Dynamics, Inc. since February 1995. From February 1988
to May 1995, Mr. Henson served as Chief Executive Officer of Endosonics
Corporation, a medical device company. Mr. Henson has also served as Chairman
of the Board of Endosonics since February 1993. From April 1983 to February
1988, Mr. Henson served as President and Chief Executive Officer of Trimedyne,
Inc., a manufacturer of medical lasers and catheters. Prior to joining
Trimedyne in 1983, Mr. Henson held positions as Vice President for G. D.
Searle & Company, Director of Marketing for the Hospital Products Division of
Abbott Laboratories and Marketing Manager for Bristol-Myers Squibb Company.
Mr. Henson is presently a director of Endosonics Corporation.
Mr. LaViolette has served as a director of the Company since April 1996. Mr.
LaViolette is a Senior Vice President and Group President of Boston Scientific
Corporation. He joined Boston Scientific Corporation in 1994 as President of
Boston Scientific International and in 1995 became Group President for the
Nonvascular Businesses, which includes Microvasive Endoscopy and Microvasive
Urology. Previously, Mr. LaViolette was with C. R. Bard, Inc. for ten years,
where he served as President of Bard's
40
<PAGE>
USCI Division from 1993 to 1994 and its USCI Angioplasty Division from 1991 to
1993. Before that time, he held several other marketing positions at Bard.
Previously, he was with the Kendall Company, Hospital Products Division.
Mr. Momsen has served as a director of the Company since December 1992. Since
1981, Mr. Momsen has been a general partner of InterWest Partners, a venture
capital firm. Mr. Momsen is also a director of COR Therapeutics, Inc., Coulter
Pharmaceutical, Inc., and Progenitor, Inc., each of which is a
biopharmaceutical company, and Innovasive Devices, Inc., a tissue repair system
company, Integ Incorporated, a medical diagnostic company, ArthroCare
Corporation, a manufacturer of arthroscopic surgical equipment, and several
privately held medical companies.
Dr. Utz has served as director of the Company since September 1994. He is an
emeritus consultant, Mayo Clinic. Dr. Utz was Professor of Urology at Mayo
Clinic and the Mayo Medical School from 1957 to 1988. He holds an M.D. degree
from St. Louis University School of Medicine and a M.S. degree in Urology from
the University of Minnesota. Dr. Utz has served in many medical and
professional urological associations and received numerous prestigious awards
in the field of urology. He is the author of over 145 publications and 28
abstracts and editorials.
41
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table includes information as of October 3, 1997 concerning
the beneficial ownership of Common Stock by (i) the only shareholders known to
the Company to hold more than five percent of the Common Stock, (ii) each of
the directors of the Company, (iii) each executive officer of the Company, and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated, all beneficial owners have sole voting and investment
power over the shares held.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING SHARES
SHARES ----------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------- ------------ --------- ---------
<S> <C> <C> <C>
John Reid.............................. 563,837 6.0% 5.2%
195 Bunker Hill Avenue
Stratham, NH 03885
Boston Scientific Corporation.......... 587,500 6.3% 5.4%
One Boston Scientific Place
Natick, MA 01670
Mitchell Dann.......................... 494,357(2) 5.3% 4.5%
14405 21st Avenue North
Minneapolis, MN 55447
Jack E. Meyer.......................... 171,711 1.8% 1.6%
Buzz Benson............................ 25,334(3) * *
Janet Effland.......................... 29,049(4) * *
Michael R. Henson...................... 9,903(5) * *
Paul A. LaViolette..................... 590,000(6) 6.3% 5.4%
Robert R. Momsen....................... 18,727(7) * *
David C. Utz, M.D...................... 19,250 * *
John P. Costello....................... 14,062 * *
Wesley E. Johnson, Jr.................. 33,124 * *
Jonathan R. McGrath.................... 88,489 * *
David W. Powell........................ 9,375 * *
W. Allen Putnam........................ 73,457 * *
All directors and executive officers as
a group (13 persons).................. 1,576,830 16.4% 14.2%
</TABLE>
- --------
* Indicates ownership of less than one percent.
(1) Includes options to purchase the following number of shares, which are or
will become exercisable within 60 days of October 3, 1997: Mr. Dann,
20,000 shares; Mr. Meyer, 60,064 shares; Mr. Benson, 2,500 shares; Ms.
Effland, 2,500 shares; Mr. Henson, 2,500 shares; Mr. LaViolette, 2,500
shares; Mr. Momsen, 2,500 shares; Dr. Utz, 14,750 shares; Mr. Costello,
14,062 shares; Mr. Johnson 21,874 shares, Mr. McGrath 82,233 shares, Mr.
Powell, 9,375 shares; Mr. Putnam 25,358 shares; and all officers and
directors as a group, 260,216 shares.
(2) Includes 5,358 shares owned by M. Dann & Co. Profit Sharing Trust.
(3) Includes 1,561 shares owned individually by Mr. Benson and 21,273 shares
owned by the Piper Venture Management III Fund Limited Partnership, the
general partner of Piper Jaffray Healthcare Fund Limited Partnership. Mr.
Benson, a director of the Company, is a partner in such partnership and,
as such, may be deemed to share voting and investment power with respect
to such shares. Mr. Benson disclaims beneficial ownership of such shares
except to the extent of his respective interest in such shares arising
from his interest in the partnership.
42
<PAGE>
(4) Includes 12,721 shares owned individually by Ms. Effland and 13,828 shares
owned by CIN Ventures Nominees, Ltd., which is managed by Patricof & Co.
Ventures, Inc. Ms. Effland, a director of the Company, is a General
Partner and Vice-President of Patricof & Co. Ventures, Inc. and, as such,
may be deemed to share voting and investment power with respect to such
shares. Ms. Effland disclaims beneficial ownership of such shares except
to the extent of her respective interest in such shares arising from her
interest in the partnership.
(5) Includes 499 shares owned by the Henson Family Trust, of which Mr. Henson
is a trustee.
(6) Includes 587,500 shares owned by Boston Scientific Corporation. Mr.
LaViolette is a Senior Vice President and Group President of Boston
Scientific Corporation. Mr. LaViolette disclaims beneficial ownership of
shares held by Boston Scientific Corporation.
(7) Includes 16,227 shares owned by the Momsen Living Trust, of which Mr.
Momsen is a trustee.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares
which are designated as Common Stock, $.01 par value per share, 250,000 shares
which are designated as Series A Junior Participating Preferred Stock and
4,750,000 shares that are not designated as to terms and preferences.
COMMON STOCK
All shares of Common Stock have equal voting rights and have one vote per
share in all matters to be voted upon by shareholders. Cumulative voting in
the election of directors is not allowed. No share of Common Stock is entitled
to preference over any other share of Common Stock, and each share of Common
Stock is equal to every other share of Common Stock in all respects. All of
the outstanding shares of Common Stock are, and the shares to be sold pursuant
to this offering will be, fully paid and nonassessable. The shares of Common
Stock have no preemptive or conversion rights, no redemption or sinking fund
provisions, and are not liable for further call or assessment. Subject to the
rights of holders of any Preferred Stock that may be outstanding, each share
of Common Stock is entitled to share in any distribution of capital assets
remaining after payment of liabilities. Subject to the rights of holders of
any Preferred Stock that may be outstanding, shareholders of Common Stock are
entitled to receive dividends when and as declared by the Company's Board of
Directors out of funds legally available thereof. Any such dividends may be
paid in cash, property or shares of Common Stock.
As of October 3, 1997, there were 9,341,196 shares of Common Stock
outstanding, which were held by 236 shareholders of record.
UNDESIGNATED STOCK
The Board of Directors of the Company is empowered to establish, and to
designate the name of, each class or series of the undesignated shares and to
set the terms of such shares (including terms with respect to redemption,
sinking fund, dividend, liquidation, preemptive, conversion and voting rights
and preferences). Accordingly, the Board of Directors, without shareholder
approval, may issue undesignated stock with terms (including terms with
respect to redemption, sinking fund, dividend, liquidation, preemptive,
conversion and voting rights and preferences) that could adversely affect the
voting power and other rights of holders of the Common Stock.
The existence of undesignated stock may have the effect of discouraging an
attempt, through acquisition of a substantial number of shares of Common
Stock, to acquire control of the Company with a view to effecting a merger,
sale or exchange of assets or a similar transaction. The anti-takeover effects
of the undesignated shares may deny shareholders the receipt of a premium on
their Common Stock and may also have a depressive effect on the market price
of the Common Stock.
SHAREHOLDER RIGHTS AGREEMENT
On January 14, 1997, the Board of Directors of the Company adopted a Rights
Agreement (the "Rights Agreement"), commonly called a poison pill. Pursuant to
the terms of the Rights Agreement, one right (a "Right") was issued in respect
of each share of the Company's Common Stock outstanding. Such Rights also
attach to each share of Common Stock issued subsequent to the adoption of the
Rights Agreement, including the shares of Common Stock offered hereby. Each
Right entitles the holder to purchase a fraction of a share of the Company's
Series A Junior Participating Preferred Stock or, in certain instances, Common
Stock of the Company or stock of an Acquiring Person (as defined below) in the
event that (i) a third party or a group (an "Acquiring Person") acquires
beneficial ownership of 15% or more of the Common Stock or (ii) a tender offer
or exchange offer that would result in a person or group becoming an Acquiring
Person is commenced. The Rights Agreement will be in effect through January
14, 2007 and could have the effect of discouraging tender offers or other
transactions which could result in shareholders receiving a premium over the
market price of Common Stock. No shares of Series A Junior Participating
Preferred Stock are outstanding.
44
<PAGE>
REGISTRATION RIGHTS
Under the Urologix, Inc. Amended and Restated Investors' Rights Agreement,
dated December 1995, purchasers of the Company's formerly outstanding Series
A, Series B, Series C, and Series D Preferred Stock acquired certain demand
and piggyback registration rights for the shares of Common Stock into which
their shares of Preferred Stock converted at the time of the initial public
offering. Each holder's registration rights expire on the earlier of (i) five
years after the Company's May 1996 initial public offering, or (ii) the date
that all shares entitled to registration held by such holder may be sold under
Rule 144 during any 90-day period.
All shares of Common Stock issued upon conversion of the Series A, Series B
and Series C Stock may be sold under Rule 144(k) and all shares issued upon
conversion of the Series D Preferred Stock may be sold under Rule 144, subject
in each case to limitations applicable to affiliates. Because the warrant
holder and certain affiliates of the Company may not be able to sell all of
their shares under Rule 144 in any 90-day period, the Company obtained waivers
from those holders in connection with this offering. All other registration
rights have expired.
ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an anti-
takeover effect. These provisions are intended to provide management
flexibility to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its shareholders. However, these provisions could have the effect
of discouraging certain attempts to acquire the Company which could deprive
the Company's shareholders of opportunities to sell their shares of Common
Stock at prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act ("MBCA") provides
that, unless the acquisition of certain new percentages of voting control of
the Company (in excess of 20%, 33 1/3% or 50%) by an existing shareholder or
other person is approved by a majority of the disinterested shareholders of
the Company, the shares acquired above such new percentage level of voting
control will not be entitled to voting rights. The Company is required to hold
a special shareholders' meeting to vote on any such acquisition within 55 days
after the delivery to the Company by the acquirer of an information statement
describing, among other things, the acquirer and any plans of the acquirer to
liquidate or dissolve the Company and copies of definitive financing
agreements for any financing of the acquisition not to be provided by funds of
the acquirer. If any acquirer does not submit an information statement to the
Company within ten days after acquiring shares representing a new threshold
percentage of voting control of the Company, or if the disinterested
shareholders vote not to approve such an acquisition, the Company may redeem
the shares so acquired by the acquirer at their market value. Section 302A.671
generally does not apply to a cash offer to purchase all shares of voting
stock of the issuing corporation if such offer has been approved by a majority
vote of disinterested board members of the issuing corporation.
Section 302A.673 of the MBCA restricts certain transactions between the
Company and a shareholder who becomes the beneficial holder of 10% or more of
the Company's outstanding voting stock (an "interested shareholder") unless a
majority of the disinterested directors of the Company have approved, prior to
the date on which the shareholder acquired a 10% interest, either the business
combination transaction suggested by such a shareholder or the acquisition of
shares that made such a shareholder a statutory interested shareholder. If
such prior approval is not obtained, the statute imposes a four-year
prohibition from the statutory interested shareholder's share acquisition date
on mergers, sales of substantial assets, loans, substantial issuances of stock
and various other transactions involving the Company and the statutory
interested shareholder or its affiliates.
45
<PAGE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Bylaws and the statutes of the State of Minnesota require the
Company to indemnify any director, officer, employee or agent who was or is a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, against certain
liabilities and expenses incurred in connection with the action, suit or
proceeding, except where such persons have not acted in good faith or did not
reasonably believe that the conduct was in the best interests of the Company.
In addition, the Company has entered into indemnification agreements with
each of its directors and officers. These agreements provide for
indemnification to the full extent permitted by Minnesota Law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or other persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the
Securities and Exchange Commission (the "Commission"), such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock is Norwest
Bank Minnesota, N.A.
46
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
BT Alex. Brown Incorporated, Dain Bosworth Incorporated and PaineWebber
Incorporated, have severally agreed to purchase from the Company the following
respective numbers of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BT Alex. Brown Incorporated..........................................
Dain Bosworth Incorporated...........................................
PaineWebber Incorporated.............................................
---------
Total................................................................ 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 1,500,000, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same
terms as those on which the 1,500,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Company and holders of approximately 1,770,713 shares of Common Stock
have agreed not to offer, sell or otherwise dispose of any of such Common
Stock for a period of 90 days after the date of this Prospectus without the
prior consent of BT Alex. Brown Incorporated on behalf of the Representatives
of the Underwriters.
The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Exchange Act of 1934, as amended, certain persons
participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the Underwriters for the purpose of fixing or maintaining
the price of the Common Stock. A "syndicate covering transaction" is the bid
for or the purchase of the Common Stock on behalf of the Underwriters to
reduce a short position incurred by the Underwriters in
47
<PAGE>
connection with this offering. A "penalty bid" is an arrangement permitting
the Underwriters to reclaim the selling concession otherwise accruing to an
Underwriter or dealer in connection with this offering if the Common Stock
originally sold by such Underwriter or dealer is purchased by the Underwriters
in a syndicate covering transaction and has therefore not been effectively
placed by such Underwriter or dealer. The Underwriters have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
As permitted by Rule 103 under the Securities Exchange Act of 1934, as
amended, Underwriters or prospective Underwriters that are market markers
("passive market makers") in the Common Stock may make bids for or purchases
of Common Stock on the Nasdaq National Market until such time, if any, when a
stabilizing bid for such securities has been made. Rule 103 generally provides
that: (i) a passive market maker's net daily purchases of the Common Stock may
not exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months (or any 60 consecutive days ending within
the 10 days) immediately preceding the filing date of the Registration
Statement of which this Prospectus forms a part; (ii) a passive market maker
may not effect transactions or display bids for the Common Stock at a price
that exceeds the highest independent bid for the Common Stock by persons who
are not passive market makers; and (iii) bids made by passive market makers
must be identified as such.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota. Certain legal
matters relating to the offering will be passed upon for the Underwriters by
Dorsey & Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
48
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the offering of the
securities offered hereby. This Prospectus does not contain all of the
information set forth in such Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or as previously filed with the
Commission and incorporated herein by reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to such Registration Statement, exhibits and schedules.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the
Company can be inspected and copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New
York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. The Commission also maintains a Web site (http://www.sec.gov) at which
reports, proxy and information statements and other information regarding the
Company may be accessed. In addition, such reports, proxy statements and other
information can also be inspected at the offices of the Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
and are incorporated herein by reference (i) the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997, and (ii) the description of
the Company's capital stock contained in the Registration Statement on Form 8-
A, as filed on May 1, 1996 (file no. 0-28414).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus, except as so modified or superseded.
The Company will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon the oral or written request of any such person, a
copy of all documents which are incorporated by reference in this Prospectus,
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should
be directed to Wesley E. Johnson, Jr., Urologix, Inc. 14405 21st Avenue North,
Minneapolis, Minnesota 55447, (612) 475-1400.
49
<PAGE>
UROLOGIX, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets as of June 30, 1996 and 1997.............................. F-3
Statements of Operations for years ended June 30, 1995, 1996 and 1997.... F-4
Statements of Shareholders' Equity for years ended June 30, 1995, 1996
and 1997................................................................ F-5
Statements of Cash Flows for years ended June 30, 1995, 1996 and 1997.... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Urologix, Inc.:
We have audited the accompanying balance sheets of Urologix, Inc. (a
Minnesota corporation) as of June 30, 1996 and 1997 and the related statements
of operations, shareholders' equity, and cash flows for each of the three
fiscal years in the period ended June 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Urologix, Inc. as of June
30, 1996 and 1997, and the results of its operations and its cash flows for
each of the three fiscal years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 8, 1997
F-2
<PAGE>
UROLOGIX, INC.
BALANCE SHEETS
AS OF JUNE 30
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 65,042 $ 275,571
Available-for-sale securities..................... 40,779,176 25,825,238
Accounts receivable............................... 35,066 1,272,994
Inventories....................................... 415,920 2,119,373
Prepaids and other current assets................. 365,976 667,593
----------- ------------
Total current assets.......................... 41,661,180 30,160,769
----------- ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements............................ 79,721 539,039
Machinery, equipment and furniture................ 699,694 2,141,622
Less-Accumulated depreciation and amortization.... (401,381) (832,604)
----------- ------------
Property and equipment, net................... 378,034 1,848,057
OTHER ASSETS........................................ 328,641 3,573,261
----------- ------------
$42,367,855 $ 35,582,087
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations... $ 17,926 $ 19,531
Accounts payable.................................. 845,566 2,087,443
Accrued liabilities............................... 858,158 1,040,345
----------- ------------
Total current liabilities..................... 1,721,650 3,147,319
CAPITAL LEASE OBLIGATIONS, less current maturities.. 57,868 37,725
----------- ------------
Total liabilities............................. 1,779,518 3,185,044
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY (Note 4):
Undesignated stock, 4,750,000 shares authorized;
none issued or outstanding........................ -- --
Series A Junior Participating Preferred Stock,
250,000 shares authorized, none issued or
outstanding....................................... -- --
Common stock, $.01 par value, 25,000,000 shares
authorized;
9,128,432 and 9,256,593 shares issued and
outstanding...................................... 91,284 92,566
Additional paid-in capital........................ 59,030,559 59,131,097
Accumulated deficit............................... (18,533,506) (26,767,362)
Net unrealized losses on investments.............. -- (59,258)
----------- ------------
Total shareholders' equity.................... 40,588,337 32,397,043
----------- ------------
$42,367,855 $ 35,582,087
=========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
UROLOGIX, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
SALES.................................. $ 489,350 $ 362,118 $ 5,503,800
COST OF GOODS SOLD..................... 785,298 1,177,455 4,866,082
----------- ----------- -----------
Gross profit (loss)................ (295,948) (815,337) 637,718
----------- ----------- -----------
COSTS AND EXPENSES:
Research and development............. 4,099,070 4,811,165 5,048,917
Sales and marketing.................. 477,380 1,006,544 3,429,443
General and administrative........... 883,409 1,191,518 2,226,012
----------- ----------- -----------
Total costs and expenses........... 5,459,859 7,009,227 10,704,372
----------- ----------- -----------
OPERATING LOSS......................... (5,755,807) (7,824,564) (10,066,654)
INTEREST INCOME, net................... 329,060 231,252 1,832,798
----------- ----------- -----------
NET LOSS............................... $(5,426,747) $(7,593,312) $(8,233,856)
=========== =========== ===========
NET LOSS PER COMMON SHARE.............. $ (0.91) $ (1.22) $ (0.90)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 2)........... 5,996,162 6,235,291 9,173,419
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
UROLOGIX, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NONCUMULATIVE
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL NET TOTAL
------------------------ ----------------- PAID-IN ACCUMULATED UNREALIZED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSSES EQUITY
------------ ---------- --------- ------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994.. 3,603,993 $ 36,040 1,170,510 $11,705 $14,858,782 $ (5,513,447) -- $ 9,393,080
Stock options
exercised............. -- -- 27,394 274 10,082 -- -- 10,356
Net loss............... -- -- -- -- -- (5,426,747) -- (5,426,747)
------------ --------- --------- ------- ----------- ------------ -------- -----------
BALANCE, June 30, 1995.. 3,603,993 36,040 1,197,904 11,979 14,868,864 (10,940,194) -- 3,976,689
Issuance of preferred
stock, net............ 638,806 6,388 -- -- 4,580,676 -- -- 4,587,064
Stock options
exercised............. -- -- 160,375 1,603 63,312 -- -- 64,915
Preferred stock
conversion............ (4,242,799) (42,428) 4,665,153 46,652 (4,224) -- -- --
Shares issued through
initial public
offering, net......... -- -- 3,105,000 31,050 39,521,931 -- -- 39,552,981
Net loss............... -- -- -- -- -- (7,593,312) -- (7,593,312)
------------ --------- --------- ------- ----------- ------------ -------- -----------
BALANCE, June 30, 1996.. -- -- 9,128,432 91,284 59,030,559 (18,533,506) -- 40,588,337
Stock options
exercised............. -- -- 128,161 1,282 100,538 -- -- 101,820
Net unrealized losses
on investments........ -- -- -- -- -- -- (59,258) (59,258)
Net loss............... -- -- -- -- -- (8,233,856) -- (8,233,856)
------------ --------- --------- ------- ----------- ------------ -------- -----------
BALANCE, June 30, 1997.. -- $ -- 9,256,593 $92,566 $59,131,097 $(26,767,362) $(59,258) $32,397,043
============ ========= ========= ======= =========== ============ ======== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
UROLOGIX, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30
---------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................. $(5,426,747) $ (7,593,312) $ (8,233,856)
Adjustments to reconcile net loss to
net cash used for operating
activities--
Depreciation and amortization....... 104,433 128,770 431,223
Change in operating items:
Inventories........................ (273,850) 69,713 (1,703,453)
Accounts receivable................ -- (35,065) (1,237,928)
Prepaids and other current assets.. (191,687) (174,289) (301,617)
Accounts payable and accrued
liabilities....................... 531,670 832,458 1,424,064
Other assets....................... 51,924 (19,524) --
----------- ------------ ------------
Net cash used for operating
activities....................... (5,204,257) (6,791,249) (9,621,567)
----------- ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment.. (259,255) (134,336) (1,901,246)
Purchase of securities............... (3,229,459) (40,529,176) (83,807,022)
Proceeds from sale of securities..... 1,520,000 1,972,452 98,701,702
Purchase of intangible assets, net... -- -- (3,244,620)
----------- ------------ ------------
Net cash provided by (used for)
investing activities............. (1,968,714) (38,691,060) 9,748,814
----------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net.......................... -- 39,552,981 --
Proceeds from issuance of preferred
stock, net.......................... -- 4,587,064 --
Proceeds from exercise of stock
options............................. 10,356 64,915 101,820
Payments made on capital lease
obligations......................... (68,121) (6,650) (18,538)
----------- ------------ ------------
Net cash provided by (used for)
financing activities............. (57,765) 44,198,310 83,282
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... (7,230,736) (1,283,999) 210,529
CASH AND CASH EQUIVALENTS:
Beginning of period.................. 8,579,777 1,349,041 65,042
----------- ------------ ------------
End of period........................ $ 1,349,041 $ 65,042 $ 275,571
=========== ============ ============
Supplemental cash flow disclosures:
Cash paid for Interest................ $ 4,262 $ 3,976 $ 8,706
=========== ============ ============
Noncash investing and financing
activities:
Common stock issued upon conversion
of Preferred Stock.................. $ -- $ 42,428 $ --
=========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
Description of Operating Activities
Urologix, Inc. (Urologix or the Company) was organized to research, develop,
manufacture and market innovative devices for the treatment of benign
prostatic hyperplasia (BPH) and other urologic diseases. Since inception (May
29, 1991) through June 30, 1996, the Company was a development stage
enterprise, having devoted substantially all of its efforts to proprietary
product development and selling the Targis System to international
distributors. Such efforts also included raising capital, performing clinical
trials, and developing commercial markets. As of June 30, 1997, regulatory
approvals necessary to market the Targis System in the European Union
Countries, Japan and Canada had been obtained. On August 26, 1997, the Company
received United States Food and Drug Administration (FDA) approval to market
the Targis System in the United States. The Company is required to comply with
the regulations of the FDA in the United States.
Although the Company began actively selling its products during fiscal 1997
and no longer considers itself to be in the development stage, it has not
operated profitably to date and there are no assurances that it will operate
profitably in the future. The Company's success will be dependent upon, among
other things, the extent to which satisfactory reimbursement for the Targis
System can be obtained from health care payors and its ability to protect its
Targis System and technology under United States and international patent
laws. The Company faces and expects increasing competition from numerous other
companies developing other procedures for the treatment of BPH.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company classifies highly liquid investments with original maturities of
90 days or less to be cash equivalents. Cash equivalents are stated at cost,
which approximates market value.
Available-for-Sale Securities
The Company invests in money market funds and U.S. government and
investment-grade corporate securities with original maturities ranging from 90
days to two years. These investments are considered to be available-for-sale,
and are stated at market value, which approximates cost.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market
and consisted of:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1996 1997
-------- ----------
<S> <C> <C>
Raw materials............................................ $ 48,459 $ 915,609
Work-in-process.......................................... 54,969 352,174
Finished goods........................................... 312,492 851,590
-------- ----------
$415,920 $2,119,373
======== ==========
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Improvements that extend the
useful lives of property and equipment are capitalized at cost and
depreciated. Repairs and maintenance are charged to expense as incurred.
Depreciation is provided using the straight-line method based upon estimated
useful lives of three to seven years for machinery, equipment, furniture, and
leasehold improvements.
Other Assets
Other assets consist primarily of license fees and prepaid royalties
resulting from patent licensing agreements. The agreements require the Company
to pay a royalty on sales of certain catheters and related
F-7
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
systems. The license fees and amounts prepaid by the Company will be charged
to expense as sales are recognized.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Net Loss Per Common Share
Net loss per common share was computed by dividing net loss by the weighted
average number of shares of common stock outstanding during each period. The
impact of common stock equivalents has been excluded from the computation of
weighted average common shares outstanding, except as follows, as the effect
would be antidilutive. Pursuant to Securities and Exchange Commission rules,
stock options granted within one year prior to the date of the initial public
offering have been included in the calculation of common share equivalents as
if they were outstanding for the years ended June 30, 1995 and 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The ultimate results could differ from those estimates.
Financial Instruments
For most financial instruments, including cash, available-for-sale
securities, accounts payable and accruals, management believes that the
carrying amount approximates fair value, as the majority of these instruments
are short-term in nature.
New Accounting Pronouncements
The Company will adopt in the fiscal year ending June 30, 1998, Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128),
which was issued in February 1997. SFAS No. 128 requires disclosure of basic
earnings per share (EPS) and diluted EPS, which replaces the existing primary
EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed similar to primary EPS as
previously reported, provided that, when applying the treasury stock method to
common equivalent shares, the Company must use its average share price for the
period rather than the more dilutive greater of the average share price or end
of period share price required by APB No. 15. The Company believes this will
not have a material affect on EPS.
3. INCOME TAXES:
A reconciliation of the Company's statutory tax rate to the effective rate
for the years ended June 30 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate..................................... 34% 34% 34%
State taxes, net of federal tax benefit.................... 6 6 6
Valuation allowance........................................ (40) (40) (40)
---- ---- ----
-- % -- % -- %
==== ==== ====
</TABLE>
F-8
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of June 30, 1997, the Company had net operating loss carryforwards of
approximately $25,000,000 for federal income tax purposes that are available
to offset future taxable income through the year 2011. Certain restrictions
caused by the change in ownership resulting from sales of stock will limit
annual utilization of the net operating loss carry forwards.
The components of the Company's deferred tax asset for the years ended June
30, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net operating loss carry forwards................ $ 3,996 $ 6,802 $ 10,151
Temporary deductible differences................. -- 870 160
Valuation allowance.............................. (3,996) (7,672) (10,311)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
4. SHAREHOLDERS' EQUITY:
Initial Public Offering
In May 1996, the Company completed an initial public offering of 3,105,000
shares of common stock which generated net proceeds of $39,552,981, to be used
to fund research and development, clinical trials, sales and marketing
activities, and fixed asset and working capital requirements.
Reverse Stock Split
The Company's shareholders approved a 1-for-2 reverse common and convertible
preferred stock split effective April 30, 1996. The effect of the reverse
stock split has been reflected for all periods presented in the accompanying
financial statements.
Convertible Preferred Stock
From February through June 1994, the Company issued 1,250 Series B and
2,264,292 Series C convertible preferred shares at $4.00 and $4.40 per share,
respectively, for total net proceeds of $9,848,050. In December 1996 and March
1997, the Company completed the sales of 312,500 and 326,306 Series D
convertible preferred shares at $8.00 per share, for total net proceeds of
$4,587,064.
In conjunction with the Company's initial public offering, all shares of
convertible preferred stock were converted to 4,665,153 shares of common
stock, in accordance with each series' respective conversion ratio.
Stock Options
The Company has a stock option plan (the 1991 Stock Option Plan) which
provides for the granting of incentive stock options to employees and
nonqualified stock options to employees, directors and consultants. As of June
30, 1997, the Company has reserved 1,550,910 shares of common stock under this
plan. As of June 30, 1997, 266,969 options were available for future grants
under this plan. Options expire seven to ten years from the date of grant and
are subject to varying vesting schedules. In April 1996, the Company amended
the 1991 Stock Option Plan to provide for the automatic grant of 10,000 stock
options to each nonemployee director upon the later of initial election or the
effective date of an initial public offering. Options are granted at fair
market value, vest over four years, and expire ten years from date of grant,
or one year after the person ceases to be a director of the Company, whichever
occurs earlier.
F-9
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Shares subject to option are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
STOCK EXERCISE
OPTIONS PRICE
-------- --------
<S> <C> <C>
Balance at June 30, 1994.................................. 507,472 $ .39
Options granted......................................... 212,953 .60
Options canceled........................................ (1,206) .40
Options exercised....................................... (27,394) .36
-------- ------
Balance at June 30, 1995.................................. 691,825 .46
Options granted......................................... 376,936 8.83
Options canceled........................................ (454) .60
Options exercised....................................... (160,389) .48
-------- ------
Balance at June 30, 1996.................................. 907,918 3.93
Options granted......................................... 196,000 16.35
Options canceled........................................ (2,020) .60
Options exercised....................................... (128,161) .81
-------- ------
Balance at June 30, 1997.................................. 973,737 $ 5.47
======== ======
Options exercisable at June 30, 1997...................... 581,721 $ 2.00
======== ======
</TABLE>
The Company accounts for stock options under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these options been determined consistent with SFAS No.
123, "Accounting for Stock-Based Compensation," the net loss and loss per
share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C> <C>
Net loss............................... As reported $(7,593,312) $(8,233,856)
Pro forma (7,913,515) (9,872,331)
Net loss per share..................... As reported $ (1.22) $ (0.90)
Pro forma (1.27) (1.08)
</TABLE>
For purposes of calculating the above required disclosure, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 1996 and 1997, respectively: risk-free interest rates of 5.0% and
6.87%, no expected dividend yield, expected lives of seven years and expected
volatility of 54.25%.
The weighted average fair value of options granted during 1996 and 1997 was
$8.83 and $16.35, respectively. Options issued during 1996 and 1997, which
remain outstanding at June 30, 1997, have an exercise price between $.60 and
$18.50, a weighted average exercise price of $11.56 and a weighted average
remaining contractual life of 9.0 years.
1996 Employee Stock Purchase Plan
In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
Plan), and reserved 100,000 common shares for issuance under the Plan,
commencing upon the effective date of an initial public offering. Under the
terms of the Plan, employees may purchase common shares at prices to be
determined by the Company's board of directors, ranging from 85% to 100% of
the shares' estimated fair market value. Eligible employees elect to
participate through payroll deductions up to the maximum level established by
the board of directors, but not to exceed 10% of the participant's base pay,
as defined. As of June 30, 1996, 10,540 shares had been purchased under the
Plan for gross proceeds of $125,426.
F-10
<PAGE>
UROLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
Purchase Commitments
At June 30, 1997, the Company has orders outstanding to purchase a certain
number of Targis Control Systems, the primary system necessary for all
treatments, from a third-party vendor for a total purchase commitment of
approximately $4,050,000.
Product Manufacture
The Targis Control Unit for the Targis System is assembled by a contract
manufacturer pursuant to a supply agreement with the Company. In the event the
Company had to obtain a substitute manufacturer, the Company could experience
significant delays in obtaining a substitute supplier.
Sales Commitments
In 1996, the Company signed agreements granting Boston Scientific
Corporation and Nihon Kohden Corporation exclusive distribution rights of the
Targis System in all geographic areas other than the United States. Nihon
Kohden Corporation has exclusive distribution rights for Japan. Boston
Scientific Corporation has exclusive distribution rights for the rest of the
world.
Litigation
In 1996, the Company received notice from a licensor to a patent license,
which was contained in a settlement agreement, of its intent to terminate the
license based on allegations of the Company's breach of certain terms of the
settlement agreement. The Company's management strongly believes the
licensor's allegations are without merit and has filed a suit against the
licensor to enforce the terms of the agreement. The formal discovery period in
the lawsuit has closed, and the case is currently set for trial no later than
April 1998.
401(k) Plan
The Company provides a 401(k) savings plan to which eligible employees may
make pretax payroll contributions up to 15% of compensation. Company matching
contributions are discretionary, and none have been made to date.
Leases
The Company leases its facility and certain equipment under noncancelable
operating or capital leases, which expire at various dates through fiscal
2002. Rent expense related to operating leases was approximately $102,500,
$139,700 and $250,800 for the years ended June 30, 1995, 1996 and 1997,
respectively. Future minimum lease commitments under noncancelable operating
and capital leases with initial remaining terms of one year or more are as
follows as of June 30, 1997:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
Fiscal year:
1998.................................................. $ 207,600 $ 25,896
1999.................................................. 207,600 32,005
2000.................................................. 207,600 9,517
2001.................................................. 207,600 --
2002.................................................. 207,600 --
---------- --------
$1,038,000 67,418
==========
Less--Imputed interest.................................. (10,162)
Current maturities.................................. (19,531)
--------
Long-term capital lease obligations..................... $ 37,725
========
</TABLE>
F-11
<PAGE>
Catheter-based and truly
anesthesia-free. Targis
System treatment mini-
mizes complication risk
and patient discomfort.
[Photo of Targis
System Catheter]
THE PROCEDURE
Clinically Proven Results
[Photo of microwave energy
during procedure]
The proprietary antenna
sends microwave energy di-
rectly to the targeted area
of the prostate, allowing
higher temperatures and
longer duration for more ef-
fective treatment.
[Photo of catheter cooling]
Advanced catheter cool-
ing protects the ure-
thra, diminishing
patient discomfort and
preventing damage to im-
portant tissues.
Significant areas of ne-
crosed tissue following
Targis treatment
indicate effective, du-
rable results.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 11
Use of Proceeds.......................................................... 12
Price Range of Common Stock.............................................. 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 20
Management............................................................... 39
Security Ownership of Principal Shareholders and Management.............. 42
Description of Capital Stock............................................. 44
Underwriting............................................................. 47
Legal Matters............................................................ 48
Experts.................................................................. 48
Available Information.................................................... 49
Incorporation of Certain Documents by Reference.......................... 49
Index to Financial Statements............................................ F-1
</TABLE>
------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,500,000 Shares
(LOGO)
Common Stock
------------
PROSPECTUS
------------
BT ALEX. BROWN
DAIN BOSWORTH
Incorporated
PAINE WEBBER INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................... $ 11,566
NASD Filing Fee....................................................... 4,317
Nasdaq National Market Listing Fee.................................... 17,500
Printing Expenses..................................................... 125,000
Accounting Fees and Expenses.......................................... 75,000
Legal Fees and Expenses............................................... 125,000
Blue Sky Fees and Expenses............................................ 12,500
Fees of Transfer Agent and Registrar.................................. 10,000
Miscellaneous Expenses................................................ 119,117
--------
Total............................................................... $500,000
========
</TABLE>
All of the above expenses except the Securities and Exchange Commission
registration fee and the NASD filing fee are estimated. All of such expenses
will be borne by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Articles of Incorporation and Bylaws of Urologix
provide for indemnification of directors to the full extent permitted by the
Minnesota Business Corporation Act. Minnesota Statutes Section 302A.521
provides that a Minnesota business corporation shall indemnify any director,
officer, employee or agent of the corporation made or threatened to be made a
party to a proceeding, by reason of the former or present official capacity
(as defined therein) of the person, against judgments, penalties, fines,
settlements and reasonable expenses incurred by the person in connection with
the proceeding if certain statutory standards are met. "Proceeding" means a
threatened, pending or completed civil, criminal, administrative, arbitration
or investigative proceeding, including one by or in the right of Urologix.
In addition, the Company has entered or will enter into indemnification
agreements with each of its directors and officers which provide for
indemnification of such persons in certain circumstances. The Company has
obtained directors and officers liability insurance for each of its directors
and executive officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Urologix
pursuant to the foregoing provisions, Urologix has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Under Section 8 of the Underwriting Agreement to be filed as Exhibit 1.1
hereto, the Underwriters agreed to indemnify, under certain conditions, the
Company, its directors, certain of its officers and persons who control the
Company within the meaning of the Securities Act against certain liabilities.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
1.1 Underwriting Agreement
5.1 Opinion of Lindquist & Vennum P.L.L.P. (to be filed by amendment)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Lindquist & Vennum P.L.L.P., included in Exhibit 5.1
24.1 Power of Attorney (included in the Signature Page)
</TABLE>
II-1
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Plymouth, State of Minnesota, on the 16th day
of October, 1997.
Urologix, Inc.
By: /s/ Jack E. Meyer
-----------------------------------
JACK E. MEYER,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Each person whose signature appears below hereby constitutes and appoints
Jack E. Meyer and Wesley E. Johnson, Jr., and each of them his or her true and
lawful attorney-in-fact and agent, with full power of substitution, to sign on
his or her behalf, individually and in each capacity stated below, all
amendments and post-effective amendments to this Registration Statement on
Form S-3 and to file the same, with all exhibits thereto and any other
documents in connection therewith, with the Securities and Exchange Commission
under the Securities Act of 1933, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as each might or could do in person, hereby ratifying
and confirming each act that said attorney-in-fact and agents may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on October 16, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Mitchell Dann Chairman of the Board
- -------------------------------------
MITCHELL DANN
/s/ Jack E. Meyer Director, President and Chief
- ------------------------------------- Executive Officer
JACK E. MEYER (PRINCIPAL EXECUTIVE
OFFICER)
/s/ Wesley E. Johnson, Jr. Vice President, Chief Financial
- ------------------------------------- Officer and Secretary
WESLEY E. JOHNSON, JR. (PRINCIPAL
ACCOUNTING OFFICER)
/s/ Buzz Benson Director
- -------------------------------------
BUZZ BENSON
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Janet G. Effland Director
- -------------------------------------
JANET G. EFFLAND
/s/ Michael R. Henson Director
- -------------------------------------
MICHAEL R. HENSON
/s/ Paul A. LaViolette Director
- -------------------------------------
PAUL A. LAVIOLETTE
/s/ Robert Momsen Director
- -------------------------------------
ROBERT MOMSEN
/s/ David C. Utz, M.D. Director
- -------------------------------------
DAVID C. UTZ, M.D.
</TABLE>
II-4
<PAGE>
Exhibit 1.1
Draft: October 16, 1997
1,500,000 Shares
UROLOGIX, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
November _____, 1997
BT Alex. Brown Incorporated
Dain Bosworth Incorporated
PaineWebber Incorporated
As Representatives of the Several Underwriters
c/o BT Alex. Brown Incorporated
1 South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Urologix, Inc., a Minnesota corporation (the "Company"), proposes to sell
to the several underwriters (the "Underwriters") named in Schedule I hereto for
whom you are acting as representatives (the "Representatives") an aggregate of
1,500,000 shares of the Company's Common Stock, $.01 par value (the
"Firm Shares"). The respective amounts of the Firm Shares to be so purchased by
the several Underwriters are set forth opposite their names in Schedule I
hereto. The Company also proposes to sell at the Underwriters' option an
aggregate of up to 225,000 additional shares of the Company's Common
Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company.
The Company represents and warrants to each of the Underwriters
as follows:
(a) A registration statement on Form S-3 (File No. 333- ) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the
<PAGE>
Securities Act of 1933, as amended (the "Act"), and the Rules and
Regulations promulgated thereunder (the "Rules and Regulations") by
the Securities and Exchange Commission (the "Commission") and has been
filed with the Commission. The conditions for the use of Form S-3
under the Act have been satisfied. Copies of such registration
statement, including any amendments thereto, the preliminary
prospectuses (meeting the requirements of the Rules and Regulations)
contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been
delivered by the Company to you, and, to the extent applicable, were
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to the Commission's Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR"), except to the extent
permitted by Regulation S-T. Such registration statement, as amended
at the time when it was declared effective and including any
registration statement filed by the Company pursuant to Rule 462(b) of
the Act, is herein referred to as the "Registration Statement," which
shall be deemed to include all information omitted therefrom in
reliance upon Rule 430A and contained in the Prospectus referred to
below. The Registration Statement has become effective under the Act
and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. "Prospectus" means (a) the
form of prospectus first filed with the Commission pursuant to Rule
424(b) or (b) the last form of preliminary prospectus included in the
Registration Statement filed prior to the time it became effective or
filed pursuant to Rule 424(a) under the Act that is delivered by the
Company to the Underwriters for delivery to purchasers of the Shares,
together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act, if any. Each
preliminary prospectus included in the Registration Statement prior to
the time it becomes effective is herein referred to as a "Preliminary
Prospectus." Any reference herein to the Registration Statement, any
Preliminary Prospectus or to the Prospectus shall be deemed to refer
to and include any documents incorporated by reference therein filed
with the Commission under the Securities Exchange Act of 1934 (the
"Exchange Act"), and, in the case of any reference herein to any
Prospectus, also shall be deemed to include any documents incorporated
by reference therein, and any supplements or amendments thereto, filed
with the Commission under the Exchange Act after the date of filing of
the Prospectus under Rules 424(b) or 430A, and prior to the
termination of the offering of the Shares by the Underwriter. For
purposes of this Agreement, all references to the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement to any of the foregoing shall be deemed to
include the respective copies thereof filed with the Commission
pursuant to EDGAR.
(b) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Minnesota, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement. The Company has no subsidiaries. The Company is duly
qualified to transact business in all jurisdictions in which the
conduct of its business requires such qualification, except to the
extent that the failure to be so qualified would not have a material
adverse effect on the business, financial condition or results of
operations of the Company.
(c) The outstanding shares of Common Stock of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; the Shares have been duly authorized and when issued
and paid for as contemplated herein will be validly issued, fully paid
and non-assessable; and no preemptive rights of shareholders exist
with respect to any of the Shares or the issue and sale thereof.
Neither the filing of the Registration Statement nor the offering or
sale of the Shares as contemplated by this Agreement gives rise to
2
<PAGE>
any rights, other than those which have been waived or satisfied, for
or relating to the registration of any shares of Common Stock.
(d) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. All of the
Shares conform to the description thereof contained in the
Registration Statement. The form of certificates for the Shares
conforms to the corporate law of the jurisdiction of the Company's
incorporation.
(e) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering
of the Shares nor instituted proceedings for that purpose. The
Registration Statement at the time it was declared effective
contained, and any post-effective amendments thereto when filed under
the Act will contain, all statements which are required to be stated
therein by the Act and the Rules and Regulations, and conformed or
will conform, as the case may be, in all material respects to the
requirements of the Act and the Rules and Regulations. The Prospectus
contains, and any amendments or supplements thereto when first used
will contain, and any form thereof filed with the Commission pursuant
to Rule 424(b) will contain, all statements required to be stated
therein by the Act and the Rules and Regulations, and conformed or
will conform, as the case may be, in all material respects to the
requirements of the Act and the Rules and Regulations. The documents
incorporated by reference in the Prospectus conformed, at the time
they were filed with the Commission, in all material respects to the
requirements of the Exchange Act or the Act, as applicable, and the
respective rules and regulations of the Commission thereunder, and any
documents subsequently filed with the Commission and incorporated by
reference in the Prospectus will conform in all material respects to
the requirements of the Exchange Act or the Act, as applicable, and
the respective rules and regulations of the Commission thereunder. The
Registration Statement, including any post-effective amendments
thereto, at the time it was declared effective did not contain, and
will not contain, any untrue statement of a material fact and did not
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. The
Prospectus, including any amendments and supplements thereto and the
form thereof filed with the Commission pursuant to Rule 424(b), does
not contain, and will not contain, any untrue statement of material
fact, and does not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or
omitted from the Registration Statement or the Prospectus, or any such
amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any
Underwriter through the Representatives, specifically for use in the
preparation thereof.
(f) The financial statements of the Company, together with
related notes and schedules, if any, as set forth in the Registration
Statement, or incorporated by reference in the Registration Statement,
present fairly the financial position and the results of operations
and cash flows of the Company, at the indicated dates and for the
indicated periods. Such financial statements and related schedules,
if any, have been prepared in accordance with generally accepted
principles of accounting, consistently applied throughout the
periods involved, except as disclosed therein, and all adjustments
necessary for a fair presentation of results for such periods have
been made. The summary financial data included in the Registration
Statement present fairly the information shown therein and such data
has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the
Company.
3
<PAGE>
(g) To the best of our knowledge, Arthur Andersen L.L.P., who have
certified certain of the financial statements filed with the Commission as
part of, or incorporated by reference in, the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company before any court
or administrative agency or otherwise which if determined adversely to the
Company might result in any material adverse change in the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company or to prevent the
consummation of the transactions contemplated hereby, except as set forth
in the Registration Statement.
(i) The Company has good and marketable title to all of the
properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to
no lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as described in the Registration
Statement) or which do not materially or adversely affect the value of such
property or its use in the business of the Company. The Company occupies
its leased properties under valid and binding leases.
(j) The Company has filed, or has requested extensions of the filing
periods for, all Federal, State, local and foreign income tax returns which
have been required to be filed and has paid all taxes indicated by said
returns and all assessments received by it to the extent that such taxes
have become due. All tax liabilities have been adequately provided for in
the financial statements of the Company.
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change, or any development involving a
prospective material adverse change, in or affecting the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise), or prospects of the Company, whether or not
occurring in the ordinary course of business, and there has not been any
material transaction entered into or any material transaction that is
probable of being entered into by the Company, other than transactions in
the ordinary course of business and changes and transactions described in
the Registration Statement, as it may be amended or supplemented. The
Company has no material contingent obligations which are not disclosed in
the Company's financial statements or the related notes which are included
or incorporated by reference in the Registration Statement.
(l) The Company is not, nor with the giving of notice or lapse of
time or both, will be, in violation of or in default under its Articles of
Incorporation or Bylaws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by
which it, or any of its properties, is bound and which default is of
material significance in respect of the condition, financial or otherwise
of the Company or the business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the fulfillment
of the terms hereof will not conflict with or result in a breach of any
of the terms or provisions of the Articles of Incorporation or Bylaws of
the Company and will not conflict with or result in a material breach of
any of the terms or provisions of or constitute a material default under,
any indenture, mortgage, deed of trust or other agreement or instrument
to which the Company
4
<PAGE>
is a party, or any order, rule or regulation applicable to the Company of
any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(n) Except as otherwise disclosed in the Prospectus, the Company owns
or licenses all patents, patent applications, trademarks, service marks,
tradenames, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets and other similar rights
(the "Proprietary Rights") necessary for the conduct of its business. The
Company has no knowledge of any infringement by it of or conflict with any
proprietary rights of others, and the Company has not given or received any
notice or claim of conflict with the asserted proprietary rights of others
with respect to any of the foregoing except as otherwise provided in the
Prospectus. No action, suit, arbitration or legal, administrative or other
proceeding, or domestic or foreign governmental investigation is pending,
or to the best of the Company's knowledge, threatened, which involves any
Proprietary Rights. The Company is not subject to any judgment, order,
writ, injunction or decree of any court or any federal, state, local,
foreign or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, or any arbitrator, and has not
entered into and is not a party to any contract, which restricts or impairs
the use of any such Propriety Rights except as disclosed in the Prospectus.
To the best of the Company's knowledge, no Proprietary Rights used by the
Company and no services or products sold by the Company conflict with or
infringe upon any proprietary rights of any third party. The Company has
not entered into any consent, indemnification, forbearance to sue or
settlement agreement with respect to Proprietary Rights other than in the
ordinary course of business. No claims have been asserted by any person
with respect to the validity of or the Company's ownership or right to use
the Proprietary Rights and, to the best knowledge of the Company, there is
no reasonable basis for any such claim, if made, to be successful. The
Proprietary Rights are valid and enforceable and no registration relating
thereto has lapsed, expired or been abandoned or canceled or is the subject
of cancellation or other adversarial proceedings, and all applications
therefore are pending and are in good standing. The Company has complied
with its respective contractual obligations relating to the protection of
the Proprietary Rights used pursuant to license. To the best knowledge of
the Company, no person is infringing on or violating the Proprietary Rights
of the Company.
(o) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares. The Company acknowledges that the Underwriters may engage in
passive market making transactions in the Shares on the Nasdaq Stock
Market's National Market (the "Nasdaq National Market") in accordance with
Rule 103 of Regulation M.
5
<PAGE>
(p) The Company is not now, and, following the sale of the Shares,
will not be, an "investment company" within the meaning of such term under
the Investment Company Act of 1940, as amended and the rules and
regulations of the Commission thereunder.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(r) The Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of its business and
the value of its properties and as is customary for companies engaged in
similar industries.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(t) With respect to the requirements of the United States Food, Drug,
and Cosmetic Act concerning medical devices and the regulations of the
federal Food and Drug Administration, the Company hold all material
certificates, permits, authorizations, consents and orders necessary for
the conduct of its present business.
(u) Except as described in the Prospectus, there are no rulemaking or
proceedings before the United States Food and Drug Administration or
comparable, state, local or foreign government bodies which involve or, to
the best knowledge of the Company, affect the Company, which, if the
subject of an action unfavorable to the Company, could involve a
prospective material adverse change in or effect on the business, condition
(financial or otherwise), results of operations, shareholders' equity or
prospects of the Company.
(v) The Company is in compliance with all applicable existing
federal, state and local laws, regulations, orders and policies relating to
protection of human health or the environment or imposing liability or
standards of conduct concerning any Hazardous Material (as hereinafter
defined) ("Environmental Laws"), except, in each case, where such
noncompliance, singly or in the aggregate, would not have a material
adverse effect upon the business of the Company. The term "Hazardous
Material" means (i) any "hazardous substance" as defined by the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, (ii) any "hazardous waste" as defined by the Resources
Conservation and Recovery
6
<PAGE>
Act, as amended, (iii) any petroleum or petroleum product, (iv) any
polychlorinated biphenyl, (v) asbestos and asbestos containing materials
and (vi) any pollutant or contaminant or hazardous, dangerous or toxic
chemical, material, waste or substance regulated under or within the
meaning of any other Environmental Law.
(w) There is no alleged liability, or, to the best of the Company's
knowledge, potential liability (including, without limitation, alleged or
potential liability for investigatory costs, cleanup costs, governmental
response costs, natural resources damages, property damages, personal
injuries, or penalties), of the Company arising out of, based on or
resulting from (i) the presence or release into the environment of any
Hazardous Material at any location, whether or not owned by the Company, or
(ii) any violation or alleged violation of any Environmental Law (x) which
alleged or potential liability is required to be disclosed in the
Registration Statement, other than as disclosed therein, or (y) which
alleged or potential liability, singly or in the aggregate, would have a
material adverse effect upon the business of the Company.
2. Purchase, Sale and Delivery of the Firm Shares.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $ per
share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance with
Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made by
wire transfer in accordance with instructions provided by the Company
against delivery of certificates therefor to the Representatives for the
several accounts of the Underwriters. Such payment and delivery are to be
made at the offices of BT Alex. Brown Incorporated, 1 South Street,
Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business
day after the date of this Agreement or at such other time and date not
later than five business days thereafter as you and the Company shall agree
upon, such time and date being herein referred to as the "Closing Date."
(As used herein, "business day" means a day on which the New York Stock
Exchange is open for trading and on which banks in New York are open for
business and are not permitted by law or executive order to be closed.)
The certificates for the Firm Shares will be delivered in such
denominations and in such registrations as the Representatives request in
writing not later than the second full business day prior to the Closing
Date, and will be made available for inspection by the Representatives at
least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the several Underwriters to purchase
the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The option granted hereby may be exercised in
whole or in part by giving prior written notice (i) at any time before the
Closing Date and (ii) only once thereafter within 30 days after the date of
this Agreement, by you, as Representatives of the several Underwriters, to
the Company setting forth the number of Option Shares as to which the
several Underwriters are exercising the option, the names and denominations
in which the Option Shares are to be registered and the time and date at
which such certificates are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined by
the Representatives but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event
prior to the Closing Date (such
7
<PAGE>
time and date being herein referred to as the "Option Closing Date"). If
the date of exercise of the option is three or more days before the Closing
Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The number of Option Shares to be purchased by each
Underwriter shall be in the same proportion to the total number of Option
Shares being purchased as the number of Firm Shares being purchased by such
Underwriter bears to the total number of Firm Shares, adjusted by you in
such manner as to avoid fractional shares. The option with respect to the
Option Shares granted hereunder may be exercised only to cover over-
allotments in the sale of the Firm Shares by the Underwriters. You, as
Representatives of the several Underwriters, may cancel such option at any
time prior to its expiration by giving written notice of such cancellation
to the Company. To the extent, if any, that the option is exercised,
payment for the Option Shares shall be made on the Option Closing Date in
New York Clearing House funds by certified or bank cashier's check drawn to
the order of the Company against delivery of certificates therefor at the
offices of BT Alex. Brown Incorporated, 1 South Street, Baltimore,
Maryland.
3. Offering by the Underwriters.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the
public at the initial public offering price set forth in the Prospectus.
The Representatives may from time to time thereafter change the public
offering price and other selling terms. To the extent, if at all, that any
Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with
a Master Agreement Among Underwriters entered into by you and the several
other Underwriters.
4. Covenants of the Company.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, including any post-effective amendment thereto, to become
effective and remain effective. If the procedure in Rule 430A of the Rules
and Regulations is followed, the Company will prepare and timely file with
the Commission under Rule 424(b) of the Rules and Regulations a Prospectus
in a form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A of the Rules and Regulations. The Company will not
file any amendment to the Registration Statement or supplement to the
Prospectus or document incorporated by reference therein of which the
Representatives shall not previously have been advised and furnished with a
copy or to which the Representatives shall have reasonably objected in
writing or which is not in compliance with the Rules and Regulations. The
Company will file on a timely basis all reports and any definitive proxy or
information statements required to be filed by the Company with the
Commission subsequent to the date of the Prospectus and prior to the
termination of the offering of the Shares by the Underwriters. To the
extent applicable, the copies of the Registration Statement and each
amendment thereto (including all exhibits filed therewith), any Preliminary
Prospectus or Prospectus (in each case, as amended and supplemented)
furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
8
<PAGE>
(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for amendment of the Registration
Statement or for any supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to
the Representatives at or before the Closing Date, four signed copies of
the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested),
including documents incorporated by reference therein, and of all
amendments thereto, as the Representatives may reasonably request. To the
extent applicable, all such documents shall be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus
is required by law to be delivered by an Underwriter or dealer, any event
shall occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company promptly
will either (i) prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus or
(ii) prepare and file with the Commission an appropriate filing under the
Exchange Act which shall be incorporated by reference in the Prospectus so
that the Prospectus as so amended or supplemented will not, in the light of
the circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
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(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earning statement shall
satisfy the requirements of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations and will advise you in writing when such statement
has been so made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its shareholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Exchange Act. The Company will deliver to the Representatives similar
reports with respect to significant subsidiaries, as that term is defined
in the Rules and Regulations, which are not consolidated in the Company's
financial statements. To the extent applicable, all such reports or
documents shall be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 90 days
after the date of this Agreement, directly or indirectly, by the Company,
without the prior written consent of BT Alex. Brown Incorporated, otherwise
than hereunder or the issuance of shares of Common Stock upon exercise of
currently outstanding stock options or warrants or pursuant to the
Company's Employee Stock Purchase Plan or the grant of stock options to
employees of the Company pursuant the Company's 1991 Stock Option Plan.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the Nasdaq National Market.
(j) The Company has caused each officer and director and specific
shareholders of the Company to furnish to you, on or prior to the date of
this agreement, a letter or letters, in form and substance satisfactory to
the Representatives, pursuant to which each such person shall agree not to
offer, sell, sell short or otherwise dispose of any shares of Common Stock
of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Stock of the
Company or derivative of Common Stock of the Company owned by such person
or request the registration for the offer or sale of any of the foregoing
(or as to which such person has the right to direct the disposition of) for
a period of 90 days after the date of this Agreement, directly or
indirectly, except with the prior written consent of BT Alex. Brown
Incorporated (the "Lockup Agreements"). The restrictions contained in the
Lockup Agreements shall not prohibit such officers and directors from
exercising options granted by the Company to purchase shares of Common
Stock of the Company, subject to the restrictions set forth therein
regarding Common Stock of the Company received upon such exercise.
(k) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus.
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(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company to register as an investment company under the
Investment Company Act of 1940, as amended.
(m) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
5. Costs and Expenses.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for
the Company; the cost of printing and delivering to, or as requested by,
the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Underwriters' Invitation
Letter, the Blue Sky Survey and any supplements or amendments thereto; the
filing fees of the Commission; the filing fees and expenses (including
legal fees and disbursements) incident to securing any required review by
the National Association of Securities Dealers, Inc. (the "NASD") of the
terms of the sale of the Shares; the Listing Fee of the Nasdaq National
Market; and the expenses, including the fees and disbursements of counsel
for the Underwriters, incurred in connection with the qualification of the
Shares under State securities or Blue Sky laws. The Company shall not,
however, be required to pay for any of the Underwriters expenses (other
than those related to qualification under NASD regulation and State
securities or Blue Sky laws) except that, if this Agreement shall not be
consummated because the conditions in Section 6 hereof are not satisfied,
or because this Agreement is terminated by the Representatives pursuant to
Section 11 hereof, or by reason of any failure, refusal or inability on the
part of the Company to perform any undertaking or satisfy any condition of
this Agreement or to comply with any of the terms hereof on its part to be
performed, unless such failure to satisfy said condition or to comply with
said terms be due to the default or omission of any Underwriter, then the
Company shall reimburse the several Underwriters for reasonable out-of-
pocket expenses, including fees and disbursements of counsel, reasonably
incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations
hereunder; but the Company shall not in any event be liable to any of the
several Underwriters for damages on account of loss of anticipated profits
from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company contained herein, and to the performance by the
Company of its covenants and obligations hereunder and to the following
additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional
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<PAGE>
information (to be included in the Registration Statement or otherwise)
shall have been disclosed to the Representatives and complied with to their
reasonable satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing
Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Lindquist &
Vennum P.L.L.P., counsel for the Company, dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the
effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Minnesota, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; the Company is duly qualified to transact business in all
jurisdictions in which the conduct of its business requires such
qualification, and in which the failure to qualify would have a
materially adverse effect upon the business of the Company.
(ii) The Company has authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the
Prospectus; the authorized shares of the Company's Common Stock have
been duly authorized; the outstanding shares of the Company's Common
Stock have been duly authorized and validly issued and are fully
paid and non-assessable; all of the Shares conform to the
description thereof contained in the Prospectus; the certificates
for the Shares are in due and proper form; the shares of Common
Stock, including the Option Shares, if any, to be sold by the
Company pursuant to this Agreement have been duly authorized and
will be validly issued, fully paid and non-assessable when issued
and paid for as contemplated by this Agreement; and no preemptive
rights of shareholders exist with respect to any of the Shares or
the issue or sale thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of
capital stock of the Company and there are no outstanding or
authorized options, warrants or rights of any character obligating the
Company to issue any shares of its capital stock or any securities
convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in
the Prospectus, to the knowledge of such counsel, no holder of any
securities of the Company or any other person has the right,
contractual or otherwise, which has not been satisfied or effectively
waived, to cause the Company to sell or otherwise issue to them, or to
permit them to underwrite the sale of, any of the Shares or the right
to have any Common Stock or other securities of the Company included
in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act
of any shares of Common Stock or other securities of the Company.
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<PAGE>
(iv) The Registration Statement has become effective under
the Act and, to the best of the knowledge of such counsel, no stop
order proceedings with respect thereto have been instituted or are
pending or threatened under the Act.
(v) The Registration Statement and the Prospectus and each
amendment or supplement thereto and document incorporated by reference
therein (other than any statements contained in such incorporated
documents which have been modified or superseded in accordance with
the Rules and Regulations) comply as to form in all material respects
with the requirements of the Act and the Exchange Act, as applicable,
and the applicable rules and regulations of the Commission thereunder
(except that such counsel need express no opinion as to the financial
statements and related schedules and other financial or statistical
information included or incorporated by reference therein). The
conditions for the use of Form S-3 under the Act have been satisfied.
(vi) The statements under the caption "Description of
Capital Stock" in the Prospectus, insofar as such statements
constitute a summary of documents referred to therein or matters of
law, fairly summarize in all material respects the information called
for with respect to such documents and matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to or incorporated by
reference in the Registration Statement or described in the
Registration Statement or the Prospectus which are not so filed,
incorporated by reference or described as required, and such contracts
and documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company
except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Charter or Bylaws of
the Company, or any agreement or instrument known to such counsel to
which the Company is a party or by which the Company may be bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body is necessary in connection
with the execution and delivery of this Agreement and the consummation
of the transactions herein contemplated (other than as may be required
by the NASD or as required by State securities and Blue Sky laws as to
which such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
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<PAGE>
(xii) The Company is not, and, immediately following the
consummation of the transactions contemplated hereby, will not become,
as a result of the consummation of the transactions contemplated by
this Agreement, and application of the net proceeds therefrom as
described in the Prospectus, required to register as an investment
company under the 1940 Act.
(xiii) To the best of such counsel's knowledge, the
provisions regarding trade secrets, confidentiality and intellectual
property in the Company's employment agreements, the Company's
consulting agreements with members of its Scientific Advisory Board
and its consulting agreements with its clinical examiners are
enforceable in accordance with their express terms.
In rendering such opinion Lindquist & Vennum P.L.L.P. may rely as
to matters governed by the laws of states other than Minnesota or Federal
laws on local counsel in such jurisdictions, provided that in each case
Lindquist & Vennum P.L.L.P. shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition
to the matters set forth above, such opinion shall also include a statement
to the effect that nothing has come to the attention of such counsel which
leads them to believe that the Registration Statement, as of the time it
became effective under the Act, the Prospectus or any amendment or
supplement thereto, on the date it was filed pursuant to Rule 424(b), or
any of the documents incorporated by reference therein (other than any
statements contained in such incorporated documents which have been
modified or superseded in accordance with the Rules and Regulations), as of
the date of effectiveness of the Registration Statement or, in the case of
documents incorporated by reference in the Prospectus after the date of
effectiveness of the Registration Statement, as of the respective dates
when such documents were filed with the Commission, and the Registration
Statement and the Prospectus, or any amendment or supplement thereto, as of
the Closing Date or the Option Closing Date, as the case may be, contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading (except that such counsel need express no view as to
financial statements, schedules and other financial information included or
incorporated by reference therein). With respect to such statement,
Lindquist & Vennum P.L.L.P. may state that their belief is based upon the
procedures set forth therein, but is without independent check and
verification.
(c) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Kinney & Lange,
intellectual property counsel for the Company, dated the Closing Date or
the Option Closing Date, as the case may be, addressed to the Underwriters
(and stating that it may be relied upon by counsel to the Underwriters)
satisfactory to the Representatives.
(d) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Fenwick &
West, food and drug counsel for the Company, dated the Closing Date or
the Option Closing Date, as the case may be, addressed to the
Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) satisfactory to the Representatives.
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(e) The Representatives shall have received from Dorsey & Whitney
LLP, counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, with respect to the valid
incorporation and existence in good standing of the Company under the laws
of the State of Minnesota, this Agreement, the validity of the Shares and
such other matters as you may reasonably request. In rendering such
opinion Dorsey & Whitney LLP may rely as to all matters governed other than
by the laws of the State of Minnesota or Federal laws on the opinion of
counsel referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads
them to believe that the Registration Statement, as of the time it became
effective under the Act, the Prospectus or any amendment or supplement
thereto, on the date it was filed pursuant to Rule 424(b), or any of the
documents incorporated by reference therein (other than any statements
contained in such incorporated documents which have been modified or
superseded in accordance with the Rules and Regulations), as of the date of
effectiveness of the Registration Statement or, in the case of documents
incorporated by reference in the Prospectus after the date of effectiveness
of the Registration Statement, as of the respective dates when such
documents were filed with the Commission, and the Registration Statement
and the Prospectus, or any amendment or supplement thereto, as of the
Closing Date or the Option Closing Date, as the case may be, contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading (except that such counsel need express no view as to
financial statements, schedules and other financial information included or
incorporated by reference therein). With respect to such statement, Dorsey
& Whitney LLP may state that their belief is based upon the procedures set
forth therein, but is without independent check and verification.
(f) The Representatives shall have received at or prior to the
Closing Date from Dorsey & Whitney LLP a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(g) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of Arthur Andersen L.L.P.
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(h) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates
of the Chief Executive Officer and the Chief Financial Officer of the
Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under
the Act and no stop order suspending the effectiveness of the
Registration Statement has been
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<PAGE>
issued, and no proceedings for such purpose have been taken or are, to
such officer's knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to
Rules 424 or 430A under the Act have been made;
(iv) Such officer has carefully examined the Registration
Statement and the Prospectus and, in such officer's opinion, as of the
effective date of the Registration Statement, the statements contained
in the Registration Statement, including any document incorporated by
reference therein (other than any statements contained in such
incorporated documents which have been modified or superseded in
accordance with the Rules and Regulations), were true and correct, and
such Registration Statement and Prospectus did not contain an untrue
statement of material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein not misleading, and since the effective date of the
Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which
has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been
any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company as a whole or the earnings, business,
management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company, whether or not
arising in the ordinary course of business.
(i) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters
as the Representatives may reasonably have requested.
(j) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market.
(k) The Lockup Agreements described in Section 4(j) are in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in
all material respects satisfactory to the Representatives and to Dorsey &
Whitney LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company of such termination in
writing or by telegram at or prior to the Closing Date or the Option
Closing Date, as the case may be.
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In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company.
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities
to which such Underwriter or any such controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained or incorporated by reference in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or (ii) the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter
and each such controlling person upon demand for any legal or other
expenses reasonably incurred by such Underwriter or such controlling person
in connection with investigating or defending any such loss, claim, damage
or liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or not
such Underwriter or controlling person is a party to any action or
proceeding; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made or incorporated by
reference in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities to which the Company or any such director,
officer, or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained or incorporated by reference in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under
which they were made; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding; provided, however,
that each
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Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission
or alleged omission has been made or incorporated by reference in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise
have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of the provisions of
Section 8(a) or (b). In case any such proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred (or within 30 days
of presentation) the fees and expenses of the counsel retained by the
indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them
or (iii) the indemnifying party shall have failed to assume the defense and
employ counsel acceptable to the indemnified party within a reasonable
period of time after notice of commencement of the action. It is
understood that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees and expenses of more than one separate firm for all
such indemnified parties. Such firm shall be designated in writing by you
in the case of parties indemnified pursuant to Section 8(a) and by the
Company in the case of parties indemnified pursuant to Section 8(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees
to indemnify the indemnified party from and against any loss or liability
by reason of such settlement or judgment. In addition, the indemnifying
party will not, without the prior written consent of the indemnified party,
settle or compromise or consent to the entry of any judgment in any pending
or threatened claim, action or proceeding of which indemnification may be
sought hereunder (whether or not any indemnified party is an actual or
potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
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(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above in this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased
by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon such party by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join such party as an additional defendant in any
such proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the
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<PAGE>
indemnifying party to the indemnified party as such losses, claims,
damages, liabilities or expenses are incurred. The indemnity and
contribution agreements contained in this Section 8 and the representations
and warranties of the Company set forth in this Agreement shall remain
operative and in full force and effect, regardless of (i) any investigation
made by or on behalf of any Underwriter or any person controlling any
Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. Default by Underwriters.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company),
you, as Representatives of the Underwriters, shall use your reasonable
efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as
may be agreed upon, and upon the terms set forth herein, of the Firm Shares
or Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representatives, shall not have procured such other Underwriters, or any
others, to purchase the Firm Shares or Option Shares, as the case may be,
agreed to be purchased by the defaulting Underwriter or Underwriters, then
(a) if the aggregate number of shares with respect to which such default
shall occur does not exceed 10% of the Firm Shares or Option Shares, as the
case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or Option
Shares, as the case may be, which they are obligated to purchase hereunder,
to purchase the Firm Shares or Option Shares, as the case may be, which
such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case
may be, with respect to which such default shall occur exceeds 10% of the
Firm Shares or Option Shares, as the case may be, covered hereby, the
Company or you as the Representatives of the Underwriters will have the
right, by written notice given within the next 36-hour period to the
parties to this Agreement, to terminate this Agreement without liability on
the part of the non-defaulting Underwriters or of the Company except to the
extent provided in Section 8 hereof. In the event of a default by any
Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The
term "Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
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<PAGE>
10. Notices.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows:
if to the Underwriters, to BT Alex. Brown Incorporated
1 South Street
Baltimore, Maryland 21202
Attention: Steven R. Schuh
with a copy to BT Alex. Brown Incorporated
1 South Street
Baltimore, Maryland 21202
Attention: General Counsel
and Dorsey & Whitney LLP
Pillsbury Center South
220 South 6th Street
Minneapolis, Minnesota 55402
Attention: Patrick F. Courtemanche
if to the Company, to Urologix, Inc.
14405 21st Avenue North
Minneapolis, Minnesota 55447
Attention: Jack E. Meyer
with a copy to Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, Minnesota 55402
Attention: Thomas G. Lovett, IV
11. Termination.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the condition, financial or otherwise, of the Company taken
as a whole or the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company, whether or not arising in the ordinary course of business, (ii)
any outbreak or escalation of hostilities or declaration of war or national
emergency or other national or international calamity or crisis or change
in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your reasonable
21
<PAGE>
judgment, make it impracticable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) suspension of trading in
securities generally on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market or limitation on prices (other than
limitations on hours or numbers of days of trading) for securities on any
such exchange or the Nasdaq National Market, (iv) the enactment,
publication, decree or other promulgation of any statute, regulation, rule
or order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (v) declaration of a banking
moratorium by United States or New York State authorities, (vi) the
suspension of trading of the Company's Common Stock by the Commission on
the Nasdaq National Market or (vii) the taking of any action by any
governmental body or agency in respect of its monetary or fiscal affairs
which in your reasonable opinion has a material adverse effect on the
securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the
Company, as to any obligation of the Underwriters to purchase the Option
Shares, upon the occurrence at any time prior to the Option Closing Date of
any of the events described in subparagraph (b) above or as provided in
Sections 6 and 9 of this Agreement.
12. Successors.
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors and assigns,
and the officers, directors and controlling persons referred to herein, and
no other person will have any right or obligation hereunder. No purchaser
of any of the Shares from any Underwriter shall be deemed a successor or
assign merely because of such purchase.
13. Information Provided by Underwriters.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the
Company for inclusion in any Prospectus or the Registration Statement
consists of the information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters),
legends required by Item 502(d) of Regulation S-K under the Act and the
information contained in the first, third, seventh and eighth paragraphs
under the caption "Underwriting" in the Prospectus.
14. Miscellaneous.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person thereof, or
by or on behalf of the Company or its directors or officers and (c)
delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
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<PAGE>
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
Urologix, Inc.
By:
---------------------------------------
Jack E. Meyer
President and Chief Executive
Officer
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT Alex. Brown Incorporated
Dain Bosworth Incorporated
PaineWebber Incorporated
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By:
---------------------------------------
Authorized Officer
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<PAGE>
SCHEDULE I
Schedule of Underwriters
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
----------- ----------------------
<S> <C>
BT Alex. Brown Incorporated....................................
Dain Bosworth Incorporated.....................................
PaineWebber Incorporated.......................................
-------------
1,700,000
Total ............................................... =============
</TABLE>
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.
Arthur Andersen LLP
Minneapolis, Minnesota
October 16, 1997
